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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ Annual Report Pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended June 27, 1998
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number: Not Applicable
________AAF-MCQUAY INC.________
(Exact name of the Registrant as specified in its charter)
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DELAWARE 41-0404230
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(State or other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
Harborplace Tower, Suite 2800
111 South Calvert Street
Baltimore, MD 21202
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (410) 528-2755
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by checkmark whether the registrant : (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant at June 30, 1998 was $-0-.
The number of shares outstanding of the registrant's only class of common
stock as of September 15, 1998 (latest practicable date) was 2,497.
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INDEX
AAF-MCQUAY INC. AND SUBSIDIARIES
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PART I
Item 1 Business................................................................................... 3
Item 2 Properties................................................................................. 11
Item 3 Legal Proceedings.......................................................................... 13
Item 4 Submission of Matters to a Vote of Securities Holders...................................... 15
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters....................... N/A
Item 6 Selected Financial Data.................................................................... 16
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 18
Item 7a Quantitative and Qualitative Disclosures about Market Risk................................. 28
Item 8 Financial Statements and Supplemental Data................................................. 29
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... N/A
PART III
Item 10 Directors and Executive Officers of the Registrant......................................... 56
Item 11 Executive Compensation..................................................................... 59
Item 12 Security Ownership of Certain Beneficial Owners and Management............................. 63
Item 13 Certain Relationships and Related Transactions............................................. 65
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 66
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PART I
ITEM 1. BUSINESS
GENERAL
In 1994, O.Y.L. Industries Berhad ("OYL"), a member of the Hong Leong Group
Malaysia ("Hong Leong"), one of Malaysia's leading manufacturers and exporters
of commercial and industrial air conditioners, refrigerators, freezers and
electrical components, purchased all the outstanding stock of the Company (then
named SnyderGeneral Corporation) for approximately $420 million, including the
assumption of debt (the "OYL Acquisition"). As part of the funding, OYL made a
cash investment of $170 million, applied both to purchase the prior owner's
interest and to restructure the Company's debt. The Company was then renamed
AAF-McQuay Inc. OYL is a subsidiary of Hume Industries Malaysia Berhad ("Hume").
Hume, like OYL, is a publicly traded Malaysian company controlled by Hong Leong.
Mr. Quek Leng Chan is Hong Leong's controlling shareholder.
The Company is a leading worldwide manufacturer and marketer of commercial
air conditioning and air filtration products and systems primarily for
commercial, institutional and industrial customers. The Company believes that it
is the leading global manufacturer of air filtration products for nonvehicular
applications and is a major participant in the global commercial heating,
ventilation and air conditioning ("HVAC") market. In addition, in December 1995,
the Company entered the industrial refrigeration business through the
acquisition of J&E Hall, the United Kingdom's leading integrated provider of
industrial refrigeration and freezing equipment. The Company maintains
production facilities in nine countries and its products are sold in over 80
countries. The Company believes that its geographic and product diversification
makes it less susceptible to an economic downturn in any particular market or
region.
The Company believes its affiliation with Hong Leong, which has a
significant Asian presence, substantially improves the Company's financial and
operating flexibility and access to Asian markets. The Company has also expanded
into other new markets outside Asia, such as Latin America, where demand has
increased and the markets remain fragmented. In addition, the Company seeks to
expand its product lines through research and development and seeks to pursue
strategic technology joint ventures and acquisitions.
The Company's Commercial Air Conditioning and Refrigeration Group engages in
the manufacture, sale, service and distribution of HVAC equipment, industrial
refrigeration and freezing products and systems. Products include chillers,
applied air handling systems, terminal air conditioning systems, industrial
refrigerators and freezers, service and parts. The Company's commercial air
conditioning equipment is sold primarily under the McQuay-Registered Trademark-
brand name and has been installed in many prominent facilities around the world,
including the GTE Headquarters in Dallas, Texas, Motorola production facilities
in the United Kingdom and Singapore, the Emirates Tower, U.A.E., the Jumerirah
Beach Hotel, U.A.E., Kodak facilities in Ontario, Philips Semiconductor
facilities in China, Taiwan and Singapore and the Jai Lie Building in Wuhan,
China. The Company's Commercial Air Conditioning and Refrigeration Group is also
the leading integrated supplier of industrial refrigeration and freezing
products and systems in the United Kingdom and is among the three largest
suppliers of industrial contact plate ("fast") freezers in the world. Industrial
refrigeration products and systems are sold under the J&E Hall-TM- brand name
and freezers are sold under the Jackstone-Registered Trademark- brand name. In
connection with its refrigeration business, the Commercial Air Conditioning and
Refrigeration Group also manufactures a line of single screw compressors which
are sold under the HallScrew-TM- brand name. In addition to establishing an
important presence in the global industrial refrigeration industry, the
acquisition of J&E Hall provided the Company with access to J&E Hall's single
screw compressor technology which has expanded the single screw chiller product
line.
The Company's Filtration Products Group engages in the manufacture, sale and
distribution of air filtration products and systems, including air filtration
equipment, air pollution control products and
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systems, machinery filtration and acoustic systems and replacement filters. The
Company's products, including replacement filters, are sold globally under the
AmericanAirFilter-Registered Trademark- and AAF-Registered Trademark- brand
names and under private label. The Company's filtration products are sold
worldwide to commercial, institutional and industrial customers as well as to
retailers for residential use. The Filtration Products Group's largest customers
include Shinwa Corporation, Wal-Mart Stores, Inc., Ace Hardware Corp., Asea
Brown Boveri ("ABB"), European Gas Turbines, Menards, and Solar Gas Turbines.
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP
The Company, through the Commercial Air Conditioning and Refrigeration
Group, is a worldwide leader in the design, manufacture, sale and service of
HVAC equipment principally for the commercial, industrial and institutional
markets. In the United States, the Company believes that its share of the
commercial air conditioning market which it serves is approximately 10%. The
Company's products are sold primarily under the widely recognized
McQuay-Registered Trademark- brand name and services are marketed under the
McQuayService-SM- name. The Company's broad range of standard and custom
products and services fulfill the HVAC requirements of most building types and
sizes and offer multiple solutions to a variety of HVAC needs. The Company
markets its commercial HVAC equipment principally to building contractors,
architects, consulting engineers, building developers and building owners. In
addition, the Company manufactures, sells and services industrial refrigeration
and freezing equipment under the J&E Hall brand names including J&E Hall-TM-,
Thermotank-Registered Trademark-, and Jackstone-Registered Trademark-. Principal
customers for refrigeration products are in the food and beverage, chemical and
naval and maritime industries. Three of the Company's facilities used to produce
its air conditioning and refrigeration products have earned ISO 9001
certification and four facilities have earned ISO 9002 certification.
The Company's Commercial Air Conditioning and Refrigeration products are
divided among the following business units: (i) chiller products, (ii) applied
air handling systems, (iii) terminal air conditioning systems, and (iv)
industrial refrigeration.
CHILLER PRODUCTS. The Company's chiller products include centrifugal,
screw, and reciprocating chillers, condensing units and air cooled condensers,
all of which frequently contain sophisticated control systems. These products
are normally engineered and assembled to meet specific design criteria for a
wide range of commercial, institutional and industrial applications. Typical
applications are large square footage buildings which require integrated HVAC
systems ranging in capacity from 10 to over 2,300 tons (the cooling capacity of
air conditioning units is measured in tons; one ton being equivalent to 12,000
BTUs and generally adequate to air condition approximately 500 square feet of
space). The Company is also the only HVAC manufacturer to offer a broad line of
dual compressor centrifugal chillers which offer improved energy efficiency
because of their unique part-load capability. The dual compressor centrifugal
chiller provides the Company with additional competitive advantages by virtue of
its small footprint, built-in redundancy, and its utilization of HFC-134a (non
CFC) refrigerant.
Under the trade name McQuayService-SM-, the Company services both its own
and its competitors' products and systems and provides start-up assistance,
warranty support, full aftermarket service, and chiller retrofit services. The
Company's service operations are conducted primarily in North America through 20
field offices and employ approximately 300 personnel. In addition to providing a
non-cyclical source of revenues, the Company's service business provides access
to the growing replacement and retrofit markets.
APPLIED AIR HANDLING SYSTEMS. Applied air handling systems include indoor
and roof mounted air handling units, packaged rooftop systems, self-contained
systems and coils with capacities up to 135 tons that are generally mounted on
the roof of a building, in ceilings and/or duct work, or installed on each floor
of a multi-story building. These units generally combine heating and cooling
capabilities in a single or self-contained configuration. The Company has a line
of advanced technology air handlers which combine
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European and North American designs to meet the market's growing demand for
quiet, reliable, high quality air handlers in response to demand for improved
indoor air quality.
TERMINAL AIR CONDITIONING SYSTEMS. Terminal air conditioning systems
consist of HVAC units that provide heating and cooling for a defined space on a
"localized" basis. They include fan-coil units, water source heat pumps,
packaged terminal air conditioners and heat pumps, unit ventilators and
mini-split systems. Capacities of individual units are less than 20 tons and
typically include electronic controls. Typical applications include facilities
where air conditioning is required on a "room-by-room" basis such as hotels/
motels, condominiums, schools and office buildings. Within the United States,
the Company believes that it is a leading manufacturer of water source heat
pumps and unit ventilators. The large installed base is expected to provide
significant replacement and service opportunities. The business unit has
recently completed initial phases of product line standardization and launched
manufacturing initiatives as a key element in their marketing mix, effectively
providing significantly reduced delivery-cycles and reduced working capital.
The Company globally serves its installed base by providing high value
support services and original specification Certified McQuay Parts-TM-. The
parts business also serves the broader HVAC replacement market through the
distribution of PTAC equipment and replacement components under its Spectrum
Parts-TM- banner. The Company provides value added through e-commerce,
electronic parts catalogs and industry leading order cycle times.
INDUSTRIAL REFRIGERATION. The acquisition of J&E Hall expanded the
Company's product offerings and also accelerated its development of the single
screw compressors that both the Company and J&E Hall had been developing
separately for several years. The Company believes that single screw chillers,
rather than the twin screw chillers produced by a number of its competitors in
the commercial HVAC and industrial refrigeration markets, provide certain
competitive advantages, including improvements in efficiency and cost, lower
service requirements and noise reduction. The Company manufactures, sells and
services industrial refrigeration and freezing equipment under several well
known J&E Hall brand names, including J&E Hall-TM-,
Thermotank-Registered Trademark-, and Jackstone-Registered Trademark-. The
principal customers for industrial refrigeration products are concentrated in
the food and meat processing, dairy, brewing and beverage (soft and alcoholic),
chemical, petrochemical, pharmaceutical, naval and merchant marine industries.
The principal customers for industrial freezers are in the food industry
generally and particularly the seafood industry. The Company manufactures
industrial refrigeration and freezer products through J&E Hall's U.K. production
facilities. In fiscal year 1997, the Company acquired Coulstock & Place
Engineering Co. Ltd., a motor rewind specialist providing support for the
compressor business.
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP STRATEGIC PARTNERSHIPS
The Company, through its Commercial Air Conditioning and Refrigeration
Group, has entered into selective strategic partnerships throughout the world to
maximize its market penetration through enhancement of its manufacturing and
distribution capabilities and further diversification of its product lines. The
Company has formed partnerships with local companies in India, Japan, Hungary,
Greece, Mexico, Puerto Rico and Spain and has entered into a partnership to sell
its products throughout Latin America. The Company has also implemented a
strategy to form strategic partnerships in selected metropolitan markets to
increase its market penetration in the domestic market, having already formed
partnerships in Philadelphia, Pennsylvania, and Atlanta, Georgia. In addition,
the Company has established regional sales offices in Beirut and Dubai and
markets its products throughout Asia, including China, through manufacturing and
sales joint ventures established by OYL.
FILTRATION PRODUCTS GROUP
Within its Filtration Products Group, the Company has two principal
businesses: replacement filters and environmental products. Replacement filters
are sold to commercial and industrial building owners,
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contractors, retailers for residential applications, hospitals and computer chip
manufacturers for clean room applications, locomotive and air conditioning
original equipment manufacturers and railroad companies. The Company has, since
the 1920's, marketed its replacement filters under the
AmericanAirFilter-Registered Trademark- and AAF-Registered Trademark- brand
names. The environmental products business has two major product areas: Air
Pollution Control Products and Systems ("APC") and Machinery Filtration and
Acoustical Systems ("MFAS") products. Environmental products are sold throughout
the world for a wide variety of commercial, institutional and industrial
applications. Three of the Company's facilities used to produce its air
filtration products have earned ISO 9001 certification, and six facilities have
earned ISO 9002 certification.
REPLACEMENT FILTER PRODUCTS
The Company believes that it is the world's largest manufacturer of
commercial, industrial and residential air filters, which are used to remove
airborne contaminants from intake and conditioned air, for a wide variety of
applications. The Company estimates its global and North American served market
share in nonvehicular applications to be approximately 15% and 20%,
respectively. The Company's filters, including replacement filters, are sold
globally under the AmericanAirFilter-Registered Trademark- and
AAF-Registered Trademark- brand names and under private label. The filters are
designed to be used in all types of air filtration systems regardless of the
original manufacturer.
The Filtration Products Group's replacement filter products consist of a
broad product line including: (i) standard filters and equipment for use in a
wide range of commercial, institutional, industrial and residential settings;
(ii) custom-designed 99.9999%+ high-efficiency filters and equipment for "clean
rooms" required by certain industries such as semiconductor manufacturers and
health care and (iii) specialty intake air filtration systems for locomotives
and other niche applications.
ENVIRONMENTAL PRODUCTS
AIR POLLUTION CONTROL PRODUCTS AND SYSTEMS. The Company's APC equipment is
designed to improve atmospheric quality by removing airborne pollutants such as
dust, mist and fumes from air exhaust streams. APC systems are sold primarily in
Europe, Latin America and Asia and include design and construction services. The
Company markets APC equipment to a broad range of industrial customers including
the food, pharmaceutical, chemical, steel, cement, power generation, waste
incineration, chemical and pulp and paper industries, as well as special market
niches such as woodworking companies, welding shops and restaurants. The
Company's APC equipment includes wet and dry scrubbers, cartridge and fabric
filter collectors, electrostatic precipitators and dust and mist collection
products. These products collect contaminants, recover materials from the
manufacturing process and solve in-plant air quality problems. APC systems
offered by the Company are integrated systems engineered to combine air
pollution control equipment with peripheral equipment, ductwork and
instrumentation to produce an integrated emission control process.
MACHINERY FILTRATION AND ACOUSTICAL SYSTEMS ("MFAS"). MFAS products and
systems are designed to remove particulate contamination from air supplies to
machines to reduce the performance inhibiting effects of corrosion, erosion and
fouling. Acoustical systems are designed to protect the environment in which the
machines are installed from excessive noise pollution generated by the machines
and their ancillary processes.
Machinery filtration systems can include weather protection, mechanical
separators, high efficiency barrier filters enhanced by lower efficiency
pre-filtration and self-cleaning reverse pulse filters, and they can also
incorporate air tempering equipment including anti-ice systems and evaporative
coolers. Acoustical equipment includes air intake ducts and silencers, high
temperature exhaust ducts and silencers, ventilation fan silencers and machinery
enclosures, all designed individually or as integrated systems with ancillary
access, supports, controls and instrumentation systems. The Company designs and
supplies MFAS products and systems to major machinery manufacturers for the oil,
gas, electrical and chemical/petro-
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chemical industries in the global market. Continued research and development of
products and systems allows the Company to provide a complete range of products
and a single source, total package capability for its customers.
FILTRATION PRODUCTS GROUP STRATEGIC ALLIANCES
The Company, through its Filtration Products Group, has entered into
selective strategic partnerships and alliances throughout the world to maximize
its market penetration through enhancement of its manufacturing and distribution
capabilities and further diversification of its product lines. The Company has
formed partnerships with local companies in Japan, Korea, India, Saudi Arabia
and Malaysia to manufacture and distribute its products. In addition, the
Company has entered into technology sharing agreements for the development of
synthetic pinch frame filters, antimicrobial filters and high efficiency
synthetic media.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note 14 "Segment Information" in the Notes to the Consolidated Financial
Statements.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
See Note 14 "Segment Information" in the Notes to the Consolidated Financial
Statements.
SALES AND DISTRIBUTION
GENERAL. The Company has a diverse base of customers. No customer of the
Commercial Air Conditioning and Refrigeration Group or the Filtration Products
Group accounted for more than 10% of the Company's net sales of these products
over the past three fiscal years.
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP. The Company
distributes its commercial HVAC equipment and systems in the United States and
Canada through a network of approximately 140 independent manufacturers'
representatives and joint ventures who sell on a commission basis. Replacement
parts for HVAC equipment are sold through a network of 80 independent parts
distributors and two Company-owned stores. Service products and contracts are
sold through the Company's own sales force working from offices located
throughout the United States and Canada. The Company distributes its commercial
HVAC products and parts internationally through a combination of direct sales
personnel, independent distributors and joint venture partners selling in over
80 countries throughout the world.
The Company distributes its industrial refrigeration and freezer products
through a number of sales offices located throughout the United Kingdom. In
addition, the Company has an extensive field service organization with 13 branch
offices and employs approximately 110 field service technicians in the United
Kingdom.
Backlog for the Commercial Air Conditioning and Refrigeration Group at June
30, 1998 and June 30, 1997 was $138 million and $156 million, respectively.
FILTRATION PRODUCTS GROUP. The Company deploys separate sales forces and
distribution channels to market its replacement filter and environmental
products. The Company employs the industry's largest commercial replacement
filter direct sales force, with approximately 185 factory sales people worldwide
to market commercial replacement filters. Residential replacement filters are
sold primarily in the United States through national retail stores, such as
Wal-Mart, Ace Hardware, Menards and True Value/Cotter Hardware. Environmental
products are sold through factory direct sales people, independent distributors,
agents and joint venture partners. Backlog for the Filtration Products Group at
June 30, 1998 and June 30, 1997 was $59 million and $69 million, respectively.
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MANUFACTURING
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP. The Company's
commercial HVAC products are manufactured in 11 factories in the United States,
France, Italy, the United Kingdom, China, Malaysia, and Indonesia. The Company's
industrial refrigeration products are manufactured in 5 manufacturing facilities
in the United Kingdom. See "--Properties."
FILTRATION PRODUCTS GROUP. In the Company's filter manufacturing business,
fiberglass filtermedia is manufactured at 3 facilities located in the United
States, Singapore and The Netherlands and then shipped to filter assembly
facilities throughout Europe and North America from which finished products are
then shipped to customers. Air filtration equipment and systems are manufactured
at facilities located in geographically dispersed locations throughout the
world. Replacement filters are produced in 12 geographically dispersed
manufacturing facilities and environmental products are manufactured in 3
geographically dispersed manufacturing facilities. See "--Properties."
PURCHASING
The principal component parts and materials purchased by the Company for use
in its equipment and systems are compressors, electric motors, filter media,
copper tubes, glass pellets and castings, all of which are readily available
through multiple sources. No single supplier has accounted for more than 10% of
the annual purchases by the Company of raw materials or component parts in any
of the past three fiscal years. The Company believes it has contracts and
commitments or readily available sources of supply sufficient to meet its
anticipated raw material or key component requirements. The Company maintains
alternate sources for key components where dependence upon a single supplier
could have an adverse impact upon production to the extent that is
technologically and commercially feasible.
The Company negotiates corporate-wide agreements with many of its major
suppliers of purchased material. These agreements, which are typically from one
to three years in length, are intended to increase the responsiveness of
suppliers to the Company's needs and to provide the Company with assured sources
of supplies at competitive prices and terms.
COMPETITION
GENERAL. The commercial HVAC and refrigeration and air filtration business
segments are highly competitive. In the commercial HVAC industry, the principal
methods of competition are lead time, product performance, feature availability,
energy efficiency, price and service. In the refrigeration industry, competitive
factors include price, quality and a vertically integrated approach of supplying
products. In the air filtration business, participants generally compete on the
basis of service, price, quality, reliability, efficiency, conditions of sale
and range of product offering. Certain portions of these markets are also very
fragmented, both geographically and by product line. The Company believes its
competitive position is strengthened in those international markets in which it
has both a manufacturing and a marketing presence and that it has a competitive
advantage through its affiliation with Hong Leong and OYL in gaining access to
certain markets where barriers exist for non-local companies.
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP. International markets
for commercial HVAC products are competitive and fragmented along geographic and
product lines. On a global basis, the Company's primary competitors across the
full range of its HVAC product offerings are Carrier Corporation (a subsidiary
of United Technologies Corporation), The Trane Company (a division of American
Standard, Inc.) and York International Corporation. Outside North America, the
Company also competes with numerous European and Japanese companies. Competition
in the global industrial refrigeration and freezer business is fragmented,
consisting of a limited number of large companies and a significant number of
local companies. The Company believes that price and quality in addition to a
vertically integrated approach to supplying products and systems are significant
competitive factors in selling industrial refrigeration and freezer products.
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FILTRATION PRODUCTS GROUP. Competition in the air filtration products and
systems, air pollution control equipment and systems and MFAS businesses is very
fragmented. Globally, the Company competes with many companies along each
product line. The Company believes that price, quality and breadth of product
offerings are among the leading competitive factors in selling air filtration
products and systems.
RESEARCH AND DEVELOPMENT
The Company's research and development programs are involved in creating new
products, enhancing and redesigning existing equipment and systems to reduce
manufacturing costs and increasing product efficiency. The Company spent
approximately $10.0 million, $10.6 million, and $8.2 million during the years
ended June 30, 1998, June 30, 1997, and June 30, 1996, respectively, for
research and development.
A significant focus of the Company's research and development efforts since
1988 has been to develop and extend its range of water-cooled and air-cooled
chillers using advanced single screw compressor technology. The Company
introduced its first single screw air conditioning product in 1994 and has
continued to expand its offerings during fiscal 1998. It expects further single
screw air conditioning product introductions during fiscal year 1999. Single
screw compressor technology will continue to be an important element of research
and development programs in the Commercial Air Conditioning and Refrigeration
Group. J&E Hall has been marketing industrial refrigeration products using
single screw compressor technology since 1978.
The Company has developed and is now producing the next generation of air
handlers which is highly energy and sound efficient. The product is available in
a variety of configurations and material options. The Company expects this
family of products to meet the growing market for quiet, high quality air
handlers.
Additionally, the Company has introduced a new range of air cleaners; a new
extended surface pleated filter that exceeds the standards proposed in ASHRAE
62-1989R (American Society of Heating, Refrigeration and Air Conditioning
Engineers); a variety of replacement filters treated with antimicrobial agents
that inhibit the growth of various microbial contaminants on the filter media;
and a range of self-cleaning filters for gas turbines.
PATENTS AND TRADEMARKS
The Company holds numerous patents related to the design and use of its
equipment and systems that are considered important to the overall conduct of
its business. The Company's policy is to maintain patent protection for as many
of its new products as possible. The Company believes that certain of its
patents are important to distinguish the Company's equipment and systems from
those of its competitors; however, the Company does not consider any particular
patent, or any groups of related patents, essential to its operations. The
Company believes that its rights in its patents are adequately protected.
The Company owns several registered trademarks and operates under certain
trade names that are important in the marketing of its products, including
AmericanAirFilter-Registered Trademark-, AAF-Registered Trademark-,
McQuay-Registered Trademark-, HermanNelson-Registered Trademark-,
Thermotank-Registered Trademark-, Jackstone-Registered Trademark- and
Beth-Registered Trademark-. The Company believes that its rights to use
tradenames and trademarks are adequately protected.
EMPLOYEES
As of June 30, 1998, the Company employed approximately 6,400 employees
worldwide, with approximately 3,800 persons employed in the United States and
2,600 employed in non-U.S. locations. The Company has a total of 7 labor union
bargaining agreements, covering approximately 2,100 employees, of which 2
agreements, covering 300 employees, will expire in fiscal year 1999. The Company
currently believes that it will be able to obtain new labor agreements without
interruption of work when these agreements expire. The Company considers its
relations with its employees to be good.
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ENVIRONMENTAL REGULATIONS
Environmental laws that affect or could affect the Company's domestic
operations include, among others, the Comprehensive Environmental Response,
Compensation & Liability Act ("CERCLA"), the Clean Air Act, the Clean Water Act,
the Resource Conservation and Recovery Act ("RCRA"), the Occupational Safety and
Health Act, the National Environmental Policy Act, the Toxic Substances Control
Act, any regulations promulgated under these acts and various other federal,
state and local laws and regulations governing environmental matters. The
Company's foreign operations are also subject to various environmental statutes
and regulations.
Some of the refrigerants used in HVAC equipment manufactured by the Company
are regulated under international agreements and domestic and foreign laws and
regulations governing stratospheric ozone depleting chemicals.
In 1987, the United States became a signatory to the Montreal Protocol. The
Montreal Protocol has been amended several times since 1987, including in 1990
(the "London Amendments"), in 1992 (the "Copenhagen Amendments"), and in 1997
(the "Montreal Amendments"). Over 100 countries are signatories to the Montreal
Protocol and the London Amendments. More than 70 countries (including the United
States) have also agreed to abide by the Montreal Protocol as amended by the
Copenhagen Amendments. The United States has not yet ratified the Montreal
Amendments.
Under the Montreal Protocol, as amended, consumption (defined as production
plus imports minus exports) of chlorofluorocarbons ("CFC") by participating
industrialized companies is banned, with limited exceptions, as of January 1,
1997. Additionally, the Montreal Protocol places a cap on the consumption of
hydrochlorofluorocarbons ("HCFC") beginning on January 1, 1997 and mandates a
gradual phaseout culminating in 2020, for participating industrialized
countries, with a ten-year service tail exemption allowing industrialized
countries to supply old equipment with HCFCs during this period. In addition,
certain countries, not including the United States, declared during December
1995 that they would take all appropriate measures to limit the use of HCFCs as
soon as possible.
The federal Clean Air Act Amendments of 1990 establish minimum statutory
timetables for the phaseout of consumption of ozone-depleting chemicals in the
United States, and authorize the EPA to establish regulatory timetables which
meet and exceed those set forth in the Montreal Protocol, as amended. Pursuant
to that authority, the EPA has adopted regulations mandating, among other things
and with limited exceptions, (a) a total ban on the consumption of CFCs by
January 1, 1997 (b) a prohibition on the consumption of HCFC-142b and HCFC-22 (a
refrigerant used in some equipment manufactured by the Company) for new
equipment beginning on January 1, 2010, (c) a ban on consumption of HCFC-142b
and HCFC-22 for use in old equipment beginning on January 1, 2020, and (d) a
phaseout of other HCFCs commencing in 2015.
The manner in which the other signatories to the Montreal Protocol implement
its requirements and regulate ozone-depleting refrigerants could differ from the
approach and timetables adopted in the United States.
With respect to the ban on consumption of CFCs (which began January 1,
1997), the Company has redesigned its large cooling capacity central station
system HVAC equipment to utilize hydrofluorocarbon-134a ("HFC-134a"), a
non-chlorinated refrigerant that is believed to be harmless to the ozone layer
and is not scheduled for elimination pursuant to the Montreal Protocol.
Substantially all major manufacturers of HVAC products, including the
Company, produce HVAC equipment for smaller cooling capacity applications that
utilize HCFC-22. The Company (and its competitors) must develop substitute
refrigerants for use in HVAC products that currently use HCFC-22 prior to the
phaseout of HCFC-22. Presently, the EPA has identified several refrigerants that
it considers acceptable HCFC-22 substitutes for certain uses applicable to some
of the Company's products. The Company is utilizing one such substitute in some
of its equipment sold in Europe and is evaluating redesigned equipment capable
of utilizing other acceptable substitutes.
10
<PAGE>
ITEM 2. PROPERTIES
A description of the Company's principal facilities with their approximate
square feet of building space is summarized below. Unless otherwise specified
below, the facilities are devoted to manufacturing:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET LEASED/OWNED PRINCIPAL FUNCTION
- -------------------------------- ----------- ----------------- ------------------------------------------------
<S> <C> <C> <C>
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP
Plymouth, Minnesota 166,000 Owned Global Commercial Air Conditioning Group
administrative, testing and research and
development facility
Staunton, Virginia 665,000 Owned Chiller products
Faribault, Minnesota 244,000 Owned Applied air handling system products
Auburn, New York 417,000 Owned Terminal air conditioning system products
Scottsboro, Alabama 270,000 Owned Applied air handling system products
Cecchina, Italy 246,000 Owned Chiller products
Pons, France 150,000 Owned Applied air handling systems and terminal air
conditioning system products
Dayton, Ohio 100,000 Leased Parts distribution
Dartford, England 105,000 Owned Headquarters for manufacturing of compressors,
industrial refrigeration packages and contact
plate freezers
Thetford, England 33,000 Leased Production of air-blast, automatic plate and
cryogenic freezers
Derby, England 17,000 Leased Spares distribution and compressor
remanufacturing facility
Birkenhead, England 7,000 Owned Compressor remanufacturing facility
Doncaster, England 5,300 Owned Motor rewinding facility
7,900 Leased Cabling facility
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
LOCATION SQUARE FEET LEASED/OWNED PRINCIPAL FUNCTION
- -------------------------------- ----------- ----------------- ------------------------------------------------
<S> <C> <C> <C>
FILTRATION PRODUCTS GROUP
Louisville, Kentucky 180,000 Owned Global Filtration Products Group Headquarters
and research and development facility
Atlanta, Georgia 113,000 Leased Replacement filters
Columbia, Missouri 58,000 Owned Replacement filters
35,000 Leased Replacement filters
Hutchins, Texas 340,000 Owned Replacement filters
Elizabethtown, Pennsylvania 160,000 Leased Replacement filters
Fayetteville, Arkansas 175,000 Owned Replacement filters
Los Angeles, California 70,000 Leased Replacement filters
Lebanon, Indiana 154,000 Leased Replacement filters
Boucherville, Quebec 62,000 Owned Replacement filters
Cramlington, England 160,000 Owned Applied air handling systems and environmental
products
Linton, England 27,000 Owned Replacement filters
Amsterdam, The Netherlands 16,000 Leased Administrative Office
Emmen, The Netherlands 97,000 Owned Replacement filters
Lubeck, Germany 19,000 Leased Engineering office
Gasny, France 109,000 Owned Environmental products
Ecoparc, France 46,000 Leased Replacement filters
Vitoria, Spain 40,000 Owned Environmental products
Singapore 41,000 Owned Replacement filters
</TABLE>
The Company's corporate headquarters is located in Baltimore, Maryland and
occupies approximately 4,200 square feet of leased space. The Company also
leases numerous facilities worldwide for use as sales and service offices,
regional warehouses and distribution centers.
Substantially all of the Company's property is subject to encumbrances. See
Notes 5 and 7 to the Consolidated Financial Statements and Notes thereto.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
ENVIRONMENTAL PROCEEDINGS.
CERCLA and other federal, state, local and foreign acts may subject the
Company to liability for the release of pollutants into the environment. CERCLA
imposes liability for the cleanup of releases of hazardous substances from a
facility on four classes of persons: the current owner and operator of the
facility, the owner and operator at the time the hazardous substances were
disposed of at the facility, waste generators that sent their wastes to the
facility, and transporters of waste who selected the facility as a disposal
site. Liability under various environmental statutes, including CERCLA, may be
imposed jointly and severally and regardless of fault.
CERCLA imposes potential liability on the Company for remediating
contamination arising from the Company's past and present operations and from
former operations by other entities at sites later acquired and now owned by the
Company. Many of the Company's facilities have operated for many years, and
substances which are or might be considered hazardous were generated, used, and
disposed of at some locations, which will require remediation. The Company has
been, and in the future could be, held responsible for environmental liabilities
resulting from former operations of other entities at facilities now owned by
the Company. In addition, the Company has agreed to indemnify parties to whom it
has sold facilities for certain environmental liabilities arising from acts
occurring before the dates those facilities were transferred.
It is possible that environmental liabilities in addition to those described
below may arise in the future. The precise costs associated with such
liabilities are difficult to predict at this time.
In 1988, the California Department of Health Services issued a Remedial
Action Order naming the Company and others as respondents in connection with
soil and groundwater contamination in the vicinity of a manufacturing facility
located in Visalia, California, that had been owned and operated by the
Company's predecessor from 1961 to 1973. The Company entered into a settlement
agreement with the other respondents under which the Company, among other
things, agreed to be solely responsible for the remaining cleanup of the site.
The Company expects no additional recoveries from its insurance carriers with
respect to this site.
On April 20, 1989, the Company and the North Carolina Department of
Environment, Health and Natural Resources ("DEHNR") entered into an
Administrative Order of Consent (the "Order"), concerning cleanup activities at
the Company's former facility located in Wilmington, North Carolina. The Order
pertained to the remediation of two separate accidental spills of 1, 1, 1
trichloroethane which occurred at this facility on November 18, 1983, and on
July 24, 1987. The Order provided that the area of residual contamination at the
site is a hazardous waste management unit subject to closure requirements under
RCRA. This Order was later vacated at the request of the Company and the Company
is in the process of negotiating a new agreement for cleanup with DEHNR.
Pursuant to the terms of the sales agreement between the Company and the current
owner of the site, the Company is obligated to undertake remediation of the site
at its sole expense. The Company settled its claims against its excess insurer
for reimbursement of environmental remediation expenses at this site in exchange
for a payment by its excess insurer of $3.0 million, which was received by the
Company in February 1998.
In March 1994, contamination was found in wetlands, soil and groundwater at
the Company's Scottsboro, Alabama, manufacturing facility. The Company purchased
the facility from Halstead Industries in 1984. The Alabama Department of
Environmental Management has required investigation and cleanup. The Company
made a claim for indemnification from Halstead Industries, which denied
responsibility. The Company filed suit against Halstead Industries and is
pursuing recoveries from Halstead through the legal system. The Company also
filed a lawsuit against its insurers in connection with its cleanup expenses,
and trial has been scheduled for later this year. The Company settled its claim
against
13
<PAGE>
two of the defendant insurance companies in exchange for their respective
payment to the Company of $450,000 which was received by the Company in February
1998 and $300,000, which was received in September 1998. The Company's claims
against its excess insurance carrier remain intact.
In addition, the Company has discovered contaminants in the soil and/or
groundwater at certain of its other manufacturing facilities. Based on
preliminary estimates prepared by the Company's environmental consultants, the
Company currently estimates that expenditures for remediation of all sites
described above will be approximately $18.0 million in the aggregate. The
Company continues to assess its insurance coverage and pursue potential recovery
of a portion of such costs from its insurers as well as third parties. See Note
12 to the Consolidated Financial Statements.
Along with multiple other parties, the Company has been identified as a
potentially responsible party under CERCLA and analogous state laws at numerous
other sites, usually as a generator of wastes which were disposed of at the
site. While CERCLA imposes joint and several liability on responsible parties,
liability at each site is likely to be apportioned among such parties. However,
the Company does not believe that its potential liability at these sites will
have a material adverse effect on the Company's financial condition or results
of operations.
IRS AUDIT.
The Internal Revenue Service ("IRS") has completed its examination of the
Company's tax returns for the years 1987 through 1994. A final executed closing
agreement is expected to be received in late September or early October of 1998.
Settlement with the IRS was essential to the settlement of the indemnification
agreement, which is described below.
INDEMNIFICATION.
The purchase agreement between OYL and the former owners of the Company
contained certain indemnifications relating to specified contingencies that
existed as of the acquisition date relating to certain environmental, tax and
litigation matters. On July 8, 1998, the Company and the former owners entered
into a settlement agreement in resolution of certain disputes which were pending
before the American Arbitration Association in Dallas, Texas, concerning the
interpretation of the indemnification obligation. As a result of the settlement
agreement, the Company paid $10.5 million of the $11.5 million promissory note
due to the former shareholders, discussed in Note 7 of the Consolidated
Financial Statements, and the parties agreed to discharge claims and
entitlements under the indemnification provisions in the purchase agreement. The
residual balance of the promissory note will be reclassified to other
liabilities for specified contingencies that existed as of the acquisition date.
In addition, as a result of the indemnification settlement agreement and the
IRS settlement described above, the Company expects to receive payments from
certain former shareholders of approximately $5 million in fiscal year 1999.
Approximately one-half of the payments to be received from the former
shareholders will be utilized to fund obligations relating to the IRS
settlement.
MISCELLANEOUS.
The Company is involved in various other lawsuits arising out of the conduct
of its business. The Company believes that the outcome of any such pending
claims or proceedings will not have a material adverse effect upon its business
or financial condition. The Company maintains various insurance policies
regarding many of such matters, including general liability and property damage
insurance, as well as product liability, workers' compensation and other
policies, which it believes provide adequate coverage for its operations.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 27, 1998, the sole shareholder elected the following persons as
members of the Board of Directors of the Company to serve until the next annual
meeting of the stockholder: Quek Leng Chan, Joseph B. Hunter, Gerald L. Boehrs,
Roger Tan Kim Hock, Ho Nyuk Choy, Liu Wan Min and Michael J. Christopher.
15
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated historical financial
data of the Company (i) prior to the OYL Acquisition (the "Predecessor
Company"), for the fiscal year ended December 31, 1993 and for the period from
January 2 to May 1, 1994 and (ii) after the OYL Acquisition (the "Successor
Company") for the period from May 2 to December 31, 1994, the six months ended
July 1, 1995, and the fiscal years ended June 30, 1996, 1997, and 1998. In 1995
the Company changed its fiscal year end from the Saturday closest to December 31
to the Saturday closest to June 30 to coincide with OYL's fiscal year. For
clarity of presentation in the consolidated financial statements, all full
fiscal years are shown to begin on January 1 and end on December 31, or to begin
on July 1 and end on June 30. For the periods presented on a basis other than a
full fiscal year, actual period end dates are used.
The table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the related Notes included herein.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------------------ ------------------------
PERIOD FROM PERIOD FROM SIX MONTHS
YEAR ENDED JANUARY 2 MAY 2 TO ENDED (D) YEAR ENDED
DECEMBER 31, TO MAY 1, DECEMBER 31, JULY 1, JUNE 30,
1993 1994 (C) 1994 1995 1996
------------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net sales............................................... $ 705,496 $ 232,484 $ 484,681 $ 428,510 $ 901,395
Cost of sales........................................... 498,640 169,357 344,120 303,699 645,149
------------- ------------ ------------- ----------- -----------
Gross profit............................................ 206,856 63,127 140,561 124,811 256,246
Operating expenses...................................... 203,344 72,777 116,320 101,535 199,550
Restructuring expenses.................................. -- -- -- -- --
------------- ------------ ------------- ----------- -----------
Operating income (loss)................................. 3,512 (9,650) 24,241 23,276 56,696
Interest expense, net................................... 41,785 13,723 16,192 11,671 24,957
Other (income) expense, net............................. 3,112 1,458 (30) (1,442) (3,219)
------------- ------------ ------------- ----------- -----------
Income (loss) before income taxes, extraordinary item
and cumulative effect of accounting changes........... (41,385) (24,831) 8,079 13,047 34,958
Income taxes(a)......................................... 4,444 324 6,834 6,755 18,423
Minority Interest Earnings.............................. -- -- -- -- --
------------- ------------ ------------- ----------- -----------
Income (loss) before, extraordinary item and cumulative
effect of accounting changes.......................... (45,829) (25,155) 1,245 6,292 16,535
Extraordinary item...................................... -- -- -- -- (1,635)(e)
(971)
Cumulative effect of accounting changes................. (b) -- -- -- --
------------- ------------ ------------- ----------- -----------
Net income (loss)....................................... $ (46,800) $ (25,155) $ 1,245 $ 6,292 $ 14,900
------------- ------------ ------------- ----------- -----------
------------- ------------ ------------- ----------- -----------
BALANCE SHEET DATA (end of period):
Working capital......................................... $ 58,384 $ 58,008 $ 30,496 $ 43,558 $ 92,613
Total assets............................................ 427,124 435,513 679,897 731,328 806,954
Total debt.............................................. 290,843 299,986 260,553 270,728 302,907
Stockholder's equity (deficit).......................... (60,749) (73,209) 172,413 188,828 199,283
OTHER DATA:
EBITDA(f)............................................... $ 21,982 $ (4,910) $ 39,012 $ 38,269 $ 85,724
Adjusted EBITDA(f)...................................... 57,180 (4,910) 39,012 38,269 85,724
Adjusted EBITDA margin.................................. 8.1% --(g) 8.0% 8.9% 9.5%
Depreciation and amortization........................... $ 21,582 $ 6,198 $ 14,741 $ 13,551 $ 25,809
Capital expenditures.................................... 8,745 1,821 8,454 5,697 14,765
Net cash provided by (used in)
Operating activities.................................. 15,252 (17,056) (5,542) (8,488) 27,962
Investing activities.................................. (8,745) (1,821) (8,454) (5,697) (49,668)
Financing activities.................................. (10,381) 20,065 8,081 20,492 27,075
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30,
1997 1998
----------- -----------
<S> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................... $ 947,933 $ 965,749
Cost of sales........................................... 694,596 705,615
----------- -----------
Gross profit............................................ 253,337 260,134
Operating expenses...................................... 212,741 224,833
Restructuring expenses.................................. -- 7,578
----------- -----------
Operating income (loss)................................. 40,596 27,723
Interest expense, net................................... 25,961 25,131
Other (income) expense, net............................. 616 (6,454)
----------- -----------
Income (loss) before income taxes, extraordinary item
and cumulative effect of accounting changes........... 14,019 9,046
Income taxes(a)......................................... 6,906 4,720
Minority Interest Earnings.............................. 476 215
----------- -----------
Income (loss) before, extraordinary item and cumulative
effect of accounting changes.......................... 6,637 4,111
Extraordinary item...................................... -- --
Cumulative effect of accounting changes................. -- --
----------- -----------
Net income (loss)....................................... $ 6,637 $ 4,111
----------- -----------
----------- -----------
BALANCE SHEET DATA (end of period):
Working capital......................................... $ 88,263 $ 68,298
Total assets............................................ 810,368 796,878
Total debt.............................................. 287,824 265,876
Stockholder's equity (deficit).......................... 204,281 205,840
OTHER DATA:
EBITDA(f)............................................... $ 65,071 $ 60,908
Adjusted EBITDA(f)...................................... 65,071 60,908
Adjusted EBITDA margin.................................. 6.9% 6.3%
Depreciation and amortization........................... $ 25,567 $ 26,946
Capital expenditures.................................... 15,941 23,922
Net cash provided by (used in)
Operating activities.................................. 26,223 27,456
Investing activities.................................. (21,285) (6,789)
Financing activities.................................. (15,083) (21,948)
</TABLE>
16
<PAGE>
FOOTNOTES TO TABLE OF SELECTED FINANCIAL DATA
(a) The Predecessor Company was taxed as an "S" corporation under the Internal
Revenue Code. Thus the Predecessor Company's income (loss) was included in
the taxable income (loss) reported by its stockholders and the Company
incurred no U.S. Federal income tax expense (benefit) and did not recognize
certain state income tax expense (benefit). The Predecessor Company's
subsidiaries (with the exception of AAF-McQuay Holdings, Inc.) were not "S"
corporations and thus incurred income tax expense (benefit) with respect to
their taxable income (loss). The Predecessor Company historically paid
dividends or otherwise
distributed amounts to its stockholders to pay taxes owed as a result of the
Predecessor Company's "S" corporation status. Substantially all of the cash
dividends were for the payment of such taxes. Effective with the OYL
Acquisition, the Company terminated its "S" corporation status and
thereafter computed its income tax expense (benefit) with respect to the
Company's consolidated income (loss).
(b) In February 1992, the FASB issued SFAS No. 109, "Accounting for Income
Taxes." This statement was adopted by the Predecessor Company for the year
ended December 31, 1993 thereby changing its method of accounting for income
taxes from the deferred method to the liability method, which resulted in a
cumulative effect charge of $1.0 million primarily related to deferred taxes
in foreign countries.
(c) The Predecessor Company recorded compensation charges in the period ending
May 1, 1994 totaling $8.8 million ($2.2 million for employment agreements,
$.7 million for stock options and $5.9 million for warrants). These charges
were triggered based upon a change in control or sale of the Predecessor
Company; and therefore, are directly attributable to the OYL Acquisition.
The related agreements terminated with the OYL Acquisition.
(d) During 1995, the Company changed the reporting of its fiscal year end from
the Saturday closest to December 31 to the Saturday closest to June 30.
Through December 31, 1994 certain foreign subsidiaries reported on fiscal
periods which ended one month prior to the Company's or Predecessor
Company's period-end. During the six month period ended July 1, 1995, the
closing date for the foreign subsidiaries was changed to reflect the
Company's current closing period. As a result, the July 1, 1995 financial
statements include the financial results of these foreign subsidiaries from
December 1, 1994 through July 1, 1995. The estimated impact on sales and
operating income for the six month period ended July 1, 1995, was an
increase in sales and operating income of $19.1 million and $0.7 million,
respectively.
(e) During the year ended June 30, 1996 the Company completed a refinancing of
its debt. As part of this refinancing the Company used some of the proceeds
from the offering to repay long-term debt. As a result, the Company recorded
an extraordinary item of $1.6 million ($2.7 million net of $1.1 million tax
benefit) relating to unamortized debt issuance cost.
(f) EBITDA represents income (loss) before extraordinary item, cumulative effect
of accounting change, interest expense, income tax expense, and depreciation
and amortization. Adjusted EBITDA excludes $35.2 million related to
potential environmental liabilities for the period ended December 31, 1993.
The Company has included information concerning EBITDA and Adjusted EBITDA
as it is relevant for debt covenant analysis and because it is used by
certain investors as a measure of the Company's ability to service its debt.
Neither EBITDA nor Adjusted EBITDA should be used as an alternative to, or
be construed as more meaningful than, operating income or cash flow from
operations as an indicator of the operating performance of the Company.
(g) For the period ended May 1, 1994 Adjusted EBITDA margin is not calculable
due to a net deficiency of earnings before taxes, depreciation and
amortization.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following should be read in conjunction with the "Selected Financial
Data" and the Consolidated Financial Statements and the Notes thereto.
The following table sets forth the major components of the consolidated
results of operations of the Company (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
Net sales................................................ $ 901,395 $ 947,933 $ 965,749
Cost of sales............................................ 645,149 694,596 705,615
---------- ---------- ----------
Gross profit............................................. 256,246 253,337 260,134
Gross margin......................................... 28.4% 26.7% 26.9%
SG&A expenses............................................ $ 186,072 $ 201,157 $ 213,176
Amortization expense..................................... 13,478 11,584 11,657
Restructuring charges.................................... -- -- 7,578
---------- ---------- ----------
Operating income......................................... 56,696 40,596 27,723
Operating margin..................................... 6.3% 4.3% 2.9%
Interest expense, net.................................... $ 24,957 $ 25,961 $ 25,131
Other (income) expense, net.............................. (3,219) 616 (6,454)
---------- ---------- ----------
Income before taxes and extraordinary item............... 34,958 14,019 9,046
Income taxes............................................. 18,423 6,906 4,720
Minority interest........................................ -- 476 215
---------- ---------- ----------
Income before extraordinary item......................... 16,535 6,637 4,111
Extraordinary item, net of tax........................... (1,635) -- --
Net income............................................... $ 14,900 $ 6,637 $ 4,111
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
BUSINESS SEGMENTS
The following table summarizes the Company's consolidated results of
operations by business segment and geographic region. The United States portion
of sales and operating income (loss) is derived from
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
sales in the United States and export sales from the United States. The
international portion of sales and operating income (loss) is generated by sales
in the rest of the world, primarily in Europe.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SEGMENT DATA
NET SALES
Commercial Air Conditioning & Refrigeration.............. $ 566,773 $ 597,216 $ 620,248
Filtration Products...................................... 356,268 365,692 358,843
Eliminations............................................. (21,646) (14,975) (13,342)
---------- ---------- ----------
Total................................................ $ 901,395 $ 947,933 $ 965,749
---------- ---------- ----------
---------- ---------- ----------
OPERATING INCOME (LOSS)
Commercial Air Conditioning & Refrigeration.............. $ 37,187 $ 23,314 $ 23,722
Filtration Products...................................... 34,876 28,869 15,369
Corporate & Amortization................................. (15,367) (11,587) (11,368)
---------- ---------- ----------
Total................................................ $ 56,696 $ 40,596 $ 27,723
---------- ---------- ----------
---------- ---------- ----------
OPERATING INCOME (LOSS) EXCLUDING AMORTIZATION AND
RESTRUCTURING CHARGES
Commercial Air Conditioning & Refrigeration.............. $ 37,187 $ 23,314 $ 23,722
Filtration Products...................................... 34,876 28,869 22,586
Corporate................................................ (1,889) (3) 650
---------- ---------- ----------
Total................................................ $ 70,174 $ 52,180 $ 46,958
---------- ---------- ----------
---------- ---------- ----------
GEOGRAPHIC DATA
NET SALES
U.S...................................................... $ 559,505 $ 575,708 $ 573,389
International............................................ 341,890 372,225 392,360
---------- ---------- ----------
Total................................................ $ 901,395 $ 947,933 $ 965,749
---------- ---------- ----------
---------- ---------- ----------
OPERATING INCOME (LOSS)
U.S...................................................... $ 46,880 $ 33,335 $ 21,107
International............................................ 25,183 18,848 17,984
Corporate and amortization............................... (15,367) (11,587) (11,368)
---------- ---------- ----------
Total................................................ $ 56,696 $ 40,596 $ 27,723
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
1998 COMPARED TO 1997
CONSOLIDATED
Consolidated net sales were $965.7 million for the fiscal year ended June
30, 1998. This represents an increase in net sales of $17.8 million, or 1.9%,
from $947.9 million for the fiscal year ended June 30, 1997. Income from
operations was $27.7 million or 2.9% of net sales versus $40.6 million or 4.3%
of net sales for fiscal years 1998 and 1997, respectively. The Company
implemented a restructuring initiative during the fourth quarter of fiscal year
1998 primarily related to the Filtration Products Group. This initiative
resulted
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
in a $7.6 million unfavorable impact on operating income for the year ended June
30, 1998. Excluding the restructuring costs, income from operations was $35.3
million or 3.7% of net sales for the year ended June 30, 1998. See Note 9 to the
Consolidated Financial Statements regarding the restructuring.
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP
NET SALES. Group net sales were $620.2 million in fiscal year 1998, an
increase of $23.0 million, or 3.9%, from $597.2 million in fiscal year 1997.
This increase was attained despite the sale of the industrial fan business in
October of 1997 which contributed sales of $7.6 million and $20.1 million in
fiscal years 1998 and 1997, respectively. Net sales increased 6.2% year over
year without the industrial fan business.
North American net sales increased 2.8% in fiscal year 1998, or 6.0%
excluding the industrial fan business, compared to the prior year. This sales
increase resulted primarily from increased sales in the applied air handling
systems and terminal air conditioning systems business units. Applied air
handling systems net sales increased 16.6% for the fiscal year 1998 versus
fiscal year 1997. Market demand for air handling rooftop products and new air
handling products continues to grow resulting in increased sales of $12.5
million for fiscal year 1998 versus the prior year. Terminal products net sales
increased 2.3% for fiscal year 1998 due to increased market demand and price
increases. A new sales office established by the Company during the first
quarter of fiscal year 1998 contributed $4.6 million in net sales for the year.
Chiller products net sales increased slightly for fiscal year 1998 versus fiscal
year 1997 as acceptance and demand for air cooled screw chiller products grew
offsetting the decline in centrifugal chillers caused by a general market
decline for this product. In addition, this increase in chiller product net
sales was offset by reduced exports from the groups domestic operations to the
Asian market during the second half of the year. The Company believes that net
sales to the Asian region will continue to slow as a result of the weak economic
conditions being experienced in the region.
International net sales for the group increased 2.2% for fiscal year 1998
versus fiscal year 1997. Strong chiller sales in the United Kingdom and Italy,
increased market demand in the Middle East and two large refrigeration contracts
contributed to increased net sales for the year. This increase was offset by
decreased net sales in France resulting from non-recurring projects in fiscal
year 1997 and a group unfavorable currency translation of $11.2 million
attributable to the strengthening of the U.S. dollar. Backlog for the Commercial
Air Conditioning and Refrigeration Group was $138.5 million as compared to
$157.9 million at June 30, 1998 and 1997, respectively.
OPERATING INCOME EXCLUDING AMORTIZATION: Operating income excluding
amortization was $23.7 million in fiscal year 1998, an increase of 1.8% from
$23.3 million in fiscal year 1997. Operating income excluding amortization as a
percent of sales decreased from 3.9% to 3.8%. The gross margin rate increased
1.6 percentage points from the prior year rate due to increased prices in the
chiller, air handling and terminal product markets. The improvement in European
operations and reduced activity in the low margin absorption chiller market also
contributed to the increase in the gross margin rate year over year. Selling,
General & Administrative expense ("SG&A") as a percentage of sales increased 1.6
percentage points in fiscal year 1998 compared to fiscal year 1997. Commission
increases due to changes in distribution pricing and warranty expense increases
resulting from new product introduction in the chiller business unit have
contributed to the increase in SG&A. Additionally, general and administrative
expenses have increased year over year as costs associated with upgrading
software systems to improve business performance have been incurred.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FILTRATION PRODUCTS GROUP
NET SALES: Net sales were $358.8 million in fiscal 1998, a decrease of $6.8
million, or 1.9%, from $365.7 million for the fiscal year ended June 30, 1997.
Excluding a group unfavorable currency impact of $15.6 million, net sales
increased 2.4% in fiscal year 1998 compared to the prior year. Domestic
operations net sales decreases due to soft market conditions were partially
offset by volume increases in the international markets of environmental
products, primarily in Europe.
Domestic operations net sales decreased 8.7% in fiscal year 1998 versus
fiscal year 1997. Environmental product sales decreased due to soft market
conditions and the uncertainties resulting from the workers strike at the Reed
facility in Louisville, Kentucky and the Company's announcement to close the
plant in the fourth quarter of fiscal year 1998. Management subsequently
implemented a restructuring program to reduce costs. Management believes the
Company will yield costs benefits as a result of the restructuring in fiscal
year 1999. Additionally, a weak cleanroom filter market and loss of market share
in the transportation market contributed to the air filtration products
decrease.
International sales for fiscal year 1998 increased 5.1% from fiscal year
1997 despite an unfavorable currency translation of $15.6 million. European net
sales increased 6.2% due to market demand increases for environmental products
and the acquisition of a European engineering company in the third quarter of
fiscal year 1997. Despite the weak economic conditions in the Asian market
during the second half of the year, net sales increased 3.6% due to growth in
the first half of the year and two MFAS projects in Singapore during the fourth
quarter of fiscal year 1998. Management believes that the slowed sales activity
experienced in the second half of fiscal year 1998 will continue as the Asian
economy remains weak.
OPERATING INCOME EXCLUDING AMORTIZATION AND RESTRUCTURING
CHARGES: Operating income excluding amortization and restructuring was $22.6
million in fiscal year 1998, a decrease of $6.3 million, or 21.8%, from $28.9
million for the fiscal year 1997. Operating income excluding amortization and
restructuring as a percent of sales decreased from 7.9% to 6.3%. Gross margins
decreased to 28.6% from 29.9% as a percentage of sales for the fiscal years
ended June 30, 1998 and June 30, 1997, respectively. Product mix and competitive
price strategies aimed at gaining market share in both the air filtration and
environmental products markets contributed to the 1.3 percentage point decrease
in gross margin year over year. SG&A excluding amortization and restructuring
decreased slightly in fiscal year 1998 from fiscal year 1997. Reductions in
selling expenses resulting from cost control measures implemented Company-wide
were offset by information technology expenses associated with upgrading
software to enhance business performance and the acquisition of an engineering
company in the third quarter of fiscal year 1997.
NON-OPERATING EXPENSES
Interest expense was $25.1 million for the fiscal year ended June 30, 1998
versus $26.0 million for the fiscal year ended June 30, 1997. The decrease in
interest expense results from reduced borrowing levels throughout fiscal year
1998. Fiscal year 1998 included net other income of $6.5 million versus fiscal
year 1997 which had net other expense of $0.6 million. This increase resulted
from the gain of $6.6 million on the sale of the industrial fan business during
the second quarter of fiscal year 1998. Other expenses, which result from
foreign currency and equity affiliate transactions, were not material for fiscal
years 1998 or 1997.
Income tax expense was $4.7 million and the effective tax rate was 52.2% for
the fiscal year ended June 30, 1998 compared to income tax expense of $6.9
million and an effective tax rate of 49.3% for the fiscal year ended June 30,
1997. The effective income tax rate increased primarily due to the effect of
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
nondeductible goodwill amortization and foreign losses not benefited against
reduced earnings for the year.
1997 COMPARED TO 1996
CONSOLIDATED
Consolidated net sales were $947.9 million for the fiscal year ended June
30, 1997. This represents an increase in net sales of $46.5 million, or 5.2%,
from $901.4 million for the fiscal year ended June 30, 1996. Income from
operations was $40.6 million or 4.3% of net sales versus $56.7 million or 6.3%
of net sales for fiscal years 1997 and 1996, respectively. The Company's ongoing
implementation of certain cost improvement and strategic initiatives, in both
the Commercial Air Conditioning and Refrigeration Group and Filtration Products
Group, unfavorably impacted operating income during the year ended June 30,
1997. The implementation of these initiatives resulted in extended delivery
times for some products and higher than anticipated manufacturing costs and
operating expenses. These strategic initiatives involve the integration and
relocation of certain product manufacturing lines, opening operations in Asia,
start up of new products, implementation of new software systems and the
consolidation of certain field sales' offices. In spite of the higher than
anticipated transition costs, the Company remains committed to these strategic
initiatives in order to realize the expected benefits.
COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP
NET SALES. Group net sales were $597.2 million in fiscal year 1997, an
increase of $30.4 million, or 5.4%, from $566.8 million in fiscal year 1996.
North American sales increased 3.5% compared to the prior year. The sales
increase was primarily the result of certain chiller, rooftop and terminal
product sales increases. Air and water cooled chiller product sales increased
7.6% resulting from continued acceptance of products utilizing the single screw
technology and export sales increases, largely to Asia. Rooftop product sales
volume increased 9.2% attributable to strong market demand and gains in market
share. Terminal Products market share also grew yielding sales increases of
19.2% over the previous year. These North American sales increases were
substantially offset by the fiscal year 1997 decrease in absorption chiller
sales versus prior year sales. Absorption chiller sales declined over 60%
primarily related to the reduction in the number of natural gas rebate and
incentive programs offered by utility companies.
Fiscal year 1997 European subsidiary sales increased 10.3%. Refrigeration
sales increased approximately $30 million which is principally the result of
inclusion of only a partial year of sales in fiscal year 1996 due to the mid
year acquisition of J&E Hall. European commercial air conditioning sales
decreased 14.3% in fiscal year 1997 as compared to 1996 due to soft market
demand for chiller and air handling products in addition to several large jobs
in the prior year that were not repeated. Also, the strengthening U.S. dollar
unfavorably impacted sales by approximately $4 million in fiscal year 1997 due
to currency translation.
OPERATING INCOME EXCLUDING AMORTIZATION. Operating income excluding
amortization was $23.3 million in fiscal year 1997, a decrease of $13.9 million,
or 37.3%, from $37.2 million in fiscal year 1996. Operating income excluding
amortization as a percent of sales decreased from 6.6% to 3.9%. The gross margin
rate decreased 1.1 percentage points from the prior year rate due primarily to
lower terminal product prices, the inclusion of several large high margin jobs
in the prior year which were not repeated and substantially increased air
handling product manufacturing costs due to new product start-up efforts.
Selling, General & Administrative expense ("SG&A") as a percentage of sales
increased 1.6 percentage points in fiscal year
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
1997 compared to fiscal year 1996. SG&A increases relate to volume increases,
higher warranty costs, an overall increased cost base due to the strengthening
of the management organization and increases in research and development
expenses primarily in single screw compressor technology.
The contribution to operating income from sales volume increases was offset by
several significant operating conditions during fiscal year 1997.
- NEW PRODUCT INTRODUCTION In fiscal year 1997, air handling operating
income decreased $6.7 million compared to the prior year. The introduction
of a new air handling product resulted in substantial manufacturing start
up costs and other expenses. However, market acceptance of this product
has been excellent with a backlog of several million dollars at the end of
fiscal year 1997.
- EUROPE Year over year operating income in European operations decreased
$5.3 million. This decrease is a combination of soft market conditions
plus the inclusion of several high margin jobs in the previous year
results.
- ABSORPTION CHILLER MARKET The cessation of natural gas rebates and
incentive programs by utilities unfavorably impacted the absorption
chiller market in fiscal year 1997. In addition to volume shrinkage during
fiscal year 1997, the Company encountered certain warranty problems on
absorption chiller units. As a result of the significant market downsize,
the Company recognized a charge for obsolete and excess inventory.
Absorption chiller sales decreased more than 60% during fiscal year 1997
as compared to 1996. These absorption chiller conditions reduced fiscal
year 1997 operating income by $3.5 million from the previous year.
FILTRATION PRODUCTS GROUP
NET SALES. Net sales were $365.7 million in fiscal 1997, an increase of
$9.4 million, or 2.6%, from $356.3 million for the fiscal year ended June 30,
1996. Environmental products sales increased 12.6% due to volume increases in
Europe, Asia and Latin America plus the acquisition of a German engineering
company. These increases were partially offset by decreased replacement air
filter sales in 1997 as compared to 1996.
International sales for fiscal year 1997 increased 10.6% from fiscal year
1996 resulting from continued growth in emerging markets in Asia and Latin
America plus an 11% increase in European environmental products sales in fiscal
year 1997. These sales increases were diluted by the impact of unfavorable
currency translation of approximately $7 million along with a decline in
European replacement air filter product sales due to soft market conditions.
Sales from U.S. operations for the fiscal year ended June 30, 1997 decreased
5.0% from fiscal year 1996. The decrease in domestic sales was primarily
attributable to complexities and difficulties in execution of new initiatives
such as the implementation of new software systems, field sales office
consolidation and establishment of a centralized call center and manufacturing
integration; all of which affected product delivery schedules. Management
believes difficulties in executing these initiatives have been largely contained
or overcome.
OPERATING INCOME EXCLUDING AMORTIZATION. Operating income excluding
amortization was $28.9 million in fiscal year 1997, a decrease of $6.0 million,
or 17.2%, from $34.9 million for the fiscal year 1996. Operating income
excluding amortization as a percent of sales decreased from 9.8% to 7.8%. Gross
margins decreased to 31.0% from 33.3% as a percentage of sales for the fiscal
years ended June 30, 1997 and June 30, 1996, respectively. Fiscal year 1997
gross margin rates declined due primarily to high manufacturing cost variances
resulting from difficulties in the execution of certain strategic initiatives.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Additionally, certain product lines experienced margin rate deterioration due to
competitive pricing pressures and initiation of certain pricing strategies aimed
at increasing market share, principally in Europe. SG&A excluding amortization
as a percentage of fiscal year 1997 sales remained constant at the prior year
level. Expense reductions gained from cost containment measures and decreased
field sales expenses resulting from the field sales office consolidation were
more than offset by volume related expense increases plus incurrence of
strategic expenses such as staffing and developing an Asian office, software
systems consulting and increased expenditures in research and development
engineering to help meet the growing demand for new products.
NON-OPERATING EXPENSES
Interest expense was $26.0 million for the fiscal year ended June 30, 1997
versus $25.0 million for the fiscal year ended June 30, 1996. The interest
expense increase was primarily attributable a higher effective borrowing rate
and increased borrowings as a result of the J&E Hall Acquisition in mid year
fiscal year 1996. Amortization expense was $11.6 million for the fiscal year
ended June 30, 1997 versus $13.5 million for the fiscal year ended June 30, 1996
due to the Company changing its estimated useful life of goodwill from 25 to 40
years effective April 1, 1996. Other expense of $.6 million for the year ended
June 30, 1997 and other income of $3.2 million for the year ended June 30, 1996
consists primarily of foreign currency transaction losses and gains and income
from equity affiliates. The change year over year is primarily due to currency
gains not repeated and reduced income from equity affiliates during the current
year.
Income tax expense was $6.9 million and the effective tax rate was 49.3% for
the fiscal year ended June 30, 1997 compared to income tax expense of $18.4
million and an effective tax rate of 52.7% for the fiscal year ended June 30,
1996. The effective income tax rate was substantially higher than the U.S.
federal statutory rate primarily due to nondeductible goodwill amortization and
foreign losses not benefited. The reduction in the effective rate was partially
attributable to the implementation of a foreign sales corporation, more
efficient utilization of foreign tax credits and the mix in earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs are provided by cash generated from operating
activities and supplemented when necessary by short-term credit facilities. For
the year ended June 30, 1998, net cash provided by operating activities was
$27.5 million as compared to a generation of $26.2 million for the year ended
June 30, 1997. For the fiscal year ended June 30, 1998 net cash used by
investing activities of $6.8 million consisted of capital expenditures of $23.9
million offset by $17.1 million in cash proceeds received from the sale of the
industrial fan business in October 1997. Net cash used in financing activities
was $21.9 million, comprised of $23.5 million in payments on long-term debt
offset by $1.6 million in net additional borrowings under short-term borrowing
arrangements.
The Company has secured certain letter of credit facilities totaling $25
million that are supported by letters of credit from OYL, the Company's parent,
which were fully utilized at June 30, 1998 and June 30, 1997. The commitments
made under these facilities expire in March 1999, but may be extended annually
for successive one year periods with the consent of OYL and the banks providing
the facilities.
J&E Hall Limited, a wholly-owned, U.K. based subsidiary of the Company, has
a short-term credit facility supported by a letter of credit from OYL.
Borrowings under this facility totaled $22.6 million at June 30, 1998 and $15.6
million at June 30, 1997. In addition, the Company's wholly-owned subsidiary in
Canada has a short-term credit facility supported by a letter of credit from
OYL. Borrowings under this facility were $5.4 million at June 30, 1998 and $5.8
million at June 30, 1997. Each of these arrangements
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
expire in September 1998, but may be extended annually for successive one year
periods with the consent of OYL and the banks providing the facilities.
During fiscal year 1998, the Company entered into an agreement to sell the
net assets of the industrial fan business. The sale transaction was completed
during the second quarter of fiscal year 1998 with sales proceeds of $17.1
million being used to reduce debt. On an on-going basis the Company seeks to
evaluate its various businesses and product lines with the objective of
enhancing shareholder value. Consistent with this strategy the Company intends
to pursue global business opportunities that are synergistic with the Company's
core business or exit low value added and non-synergistic operations. As a
result of approaches received from interested parties, OYL has appointed
BancAmerica Robertson Stephens as its financial advisor to pursue a sale process
which may or may not result in a sale of the Company.
Planned capital expenditures are approximately $19 million for the year
ending June 30, 1999 and approximately $19 million for the year ending June 30,
2000.
The ongoing costs of compliance with existing environmental laws and
regulations and the estimated costs to clean up and monitor existing
contaminated sites is not expected to have a material adverse effect on the
Company's capital expenditures or financial position. See "Legal Proceedings"
and Note 14 to the Consolidated Financial Statements.
The Internal Revenue Service ("IRS") has completed its examination of the
Company's tax returns for the years 1987 through 1994. A final executed closing
agreement is expected to be received in late September or early October of 1998.
Settlement with the IRS was essential to the settlement of the indemnification
agreement, which is described below.
The purchase agreement between OYL and the former owners of the Company
contained certain indemnifications relating to specified contingencies that
existed as of the acquisition date relating to certain environmental, tax and
litigation matters. On July 8, 1998, the Company and the former owners entered
into a settlement agreement in resolution of certain disputes which were pending
before the American Arbitration Association in Dallas, Texas, concerning the
interpretation of the indemnification obligation. As a result of the settlement
agreement, the Company paid $10.5 million of the $11.5 million promissory note
due to the former shareholders, discussed in Note 7 of the Consolidated
Financial Statements, and the parties agreed to discharge claims and
entitlements under the indemnification provisions in the purchase agreement. The
residual balance of the promissory note will be reclassified to other
liabilities for specified contingencies that existed as of the acquisition date.
In addition, as a result of the indemnification settlement agreement and the
IRS settlement described above, the Company expects to receive payments from
certain former shareholders of approximately $5 million in fiscal year 1999.
Approximately one-half of the payments to be received from the former
shareholders will be utilized to fund obligations relating to the IRS
settlement.
The Company has manufacturing facilities and sells products in various
countries around the world. As a result, the Company is exposed to movements in
exchange rates of various currencies against the U.S. dollar. Management's
response to currency movements varies (e.g. changes in pricing actions, changes
in cost structures and changes in hedging strategy). Currently, the Company
enters into short-term forward exchange contracts to hedge its exposure to
currency fluctuations affecting certain foreign currency denominated trade
payables and certain intercompany debt of its foreign subsidiaries. The Company
will continue to report, from time to time, fluctuations in both earnings and
equity due to foreign exchange movements since it is not cost-effective to
establish a hedging strategy that eliminates all risks.
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In August of 1997, the Company amended its Bank Agreement and reduced the
Revolver commitment portion of such agreement from $100 million to $80 million.
As of June 30, 1998, remaining borrowing availability under the $80 million
Revolving Credit portion of the Bank Agreement was $53.4 million. In July 1998,
the Company increased borrowings under the Revolver to fund the $10.5 million
payment made to certain former owners of the Predecessor Company which
effectively retired the $11.5 million Promissory Note. As a result, remaining
availability under the Revolver was decreased by the $10.5 million.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with borrowings under the
Amended Credit Facility (as amended in September 1998) and other short-term
credit facilities, will be adequate to make payments of principal and interest
on debt, to permit anticipated capital expenditures and to fund working capital
requirements and other cash needs. Nevertheless, the Company will remain
leveraged to a significant extent and its debt service obligations will continue
to be substantial. If the Company's sources of funds were to fail to satisfy the
Company's requirements, the Company may need to refinance its existing debt or
obtain additional financing. There is no assurance that any such new financing
alternatives would be available, and, in any case, such new financing (if
available) would be expected to be more costly and burdensome than the debt
agreements currently in place.
YEAR 2000
The Company established a formal Year 2000 program during fiscal year ending
June 30, 1998, which began with a worldwide assessment and development of a
central data base containing an inventory of the risk elements associated with
the Year 2000 issue for each of the Company's operations. The Company also
appointed an overall project coordinator and established an executive review
process. Prior to establishing a formal Year 2000 management process, the
Company had already decided to replace substantially all of its old systems with
new state-of-the-art Enterprise Resource Planning (ERP) systems. The Company
currently estimates expenditures for the new systems will aggregate
approximately $25.0 million (having incurred approximately $14.9 million as of
June 30, 1998). Expenditures for additional remedial actions beyond those
required to install new systems will be managed by the individual business units
and recognized in operating expenses. The Company's management believes that
modernizing its information systems is critical for the Company's stable and
efficient growth, and it is the basis of the Company's strategy for resolving
its Year 2000 issues.
During May 1998, the Company began its review of the products it
manufactures and sells, and though testing is not complete, the Company believes
that its products, including the control systems provided by the Company, will
be Year 2000 compliant. The Company has also identified third parties upon whom
the Company is dependent for products or services, and commenced actions during
fiscal year ending June 30, 1998, to ensure those products and services are
compliant and will not be interrupted as a result of Year 2000.
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The scheduled Year 2000 activities and current status are summarized in the
chart below:
<TABLE>
<CAPTION>
ACTIVITY STATUS STARTING ENDING
- ----------------------------------------- ------------ ------------------ ----------------
<S> <C> <C> <C>
Assessment and inventory................. Complete September 1997 January 1998
Coordinator and Executive review
process................................ Complete February 1998 May 1998
Industrial Refrigeration ERP............. Complete January 1997 April 1998
Filtration Products ERP.................. In Process April 1997 February 1999
Commercial Air Conditioning ERP.......... In Process September 1997 April 1999
Product compliance....................... In Process May 1998 TBD
Materials suppliers...................... In Process June 1998 TBD
Other IT issues including third
parties................................ Scheduled September 1998 TBD
Equipment and facilities................. Scheduled September 1998 TBD
</TABLE>
The Year 2000 activities are currently on schedule, and the Company anticipates
successful implementation of the scheduled ERP projects and systems upgrades.
Failure by the Company to complete successfully the planned ERP projects and
systems upgrades or a failure by the Company's third party suppliers and/or
service providers to produce or deliver critical components or to transport
services could cause disruption in the Company's ability to manufacture and/or
deliver timely its products to its customers, which could result in increased
expenses, reduced billings and potential litigation. The precise costs
associated with such risks are difficult to predict at this time.
SEASONALITY
The demand for certain replacement filter products, particularly residential
filters, is seasonal in nature. Normally, sales of residential filters are
relatively low in the winter and early spring with an increase in sales during
the late spring, summer and fall months. Replacement air filter sales in the
commercial and industrial markets are also higher during the spring and summer
months, although these sales are driven primarily by maintenance cycles. Sales
of some air filtration equipment are seasonal to the extent that construction
activity increases during the warmer months.
Sales of commercial air conditioning equipment are generally not seasonal.
However, the Company's air conditioning service business is seasonal in nature
due to off-season maintenance cycles and service needs during the summer months.
Demand for unitary air conditioning equipment in the small unit commercial new
construction markets varies according to the season, with increased demand
generally from March to October. Demand in the small unit commercial replacement
markets is impacted by seasonal temperature fluctuations. Sales of unit
ventilators for educational facilities tend to increase in the second and third
calendar quarters of any given year in part due to the start of a new school
year as well as the availability of bond or other funds budgeted for capital
expenditures.
FORWARD-LOOKING STATEMENTS
When used in this report by management of the Company, from time to time,
the words "believes," "anticipates," and "expects" and similar expressions are
intended to identify forward-looking statements that involve certain risks and
uncertainties. A variety of factors could cause actual results to differ
materially from those anticipated in the Company's forward-looking statements,
some of which include risk factors previously discussed in this and other SEC
reports filed by the Company. These risk factors include, but are not limited
to, general economic conditions, environmental laws and regulations, the
weakening
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asian markets, unforeseen competitive pressures, warranty expenses, market
acceptance of new products, unseasonably cool spring or summer weather, a slow
down in the chiller market, unforeseen difficulties in maintaining mutually
beneficial relationships with strategic initiatives partners, and the Year 2000
issue. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date thereof. The Company
undertakes no obligation to publicly release the results of any events or
circumstances after the date hereof to reflect the occurrence of unanticipated
events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's earnings are affected by fluctuations in the value of the U.S.
dollar, as compared to foreign currencies, as a result of transactions in
foreign markets. At June 30, 1998, the result of a uniform 10% strengthening in
the value of the dollar relative to the currencies in which the Company's
transactions are denominated would result in a decrease in operating income of
approximately $2.1 million for the year ending June 30, 1998. This calculation
assumes that each exchange rate would change in the same direction relative to
the U.S. dollar. In addition to the direct effects of changes in exchange rates,
which are a changed dollar value of the resulting sales, changes in exchange
rates also affect the volume of sales or the foreign currency sales price as
competitors' services become more or less attractive. The Company's sensitivity
analysis of the effects of changes in foreign currency exchange rates does not
factor in a potential change in sales levels or local currency prices.
While the Company is exposed to changes in interest rates as a result of its
outstanding debt, the Company does not currently utilize any derivative
financial instruments related to its interest rate exposure. Total short-term
and long-term debt outstanding at June 30, 1998 was $265.9 million, consisting
of $109.7 million in variable rate borrowing and $156.2 million in fixed rate
borrowing. At this level of variable rate borrowing , a hypothetical 10%
increase in interest rates would decrease pre-tax current year earnings by
approximately $820,000 at June 30, 1998. At June 30, 1998, the fair value of the
Company's fixed rate debt outstanding was estimated at $156.2 million using
quoted market price. A hypothetical 10% change in interest rates would not
result in a material change in the fair value of the Company's fixed rate debt.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE IN THIS
FINANCIAL STATEMENTS REPORT
- ----------------------------------------------------------------------------------------------------- ---------------
<S> <C>
Report of the Independent Auditors................................................................... 30
Consolidated Balance Sheets--
at June 30, 1998 and June 30, 1997................................................................. 31
Consolidated Statements of Operations--
Years ended June 30, 1998, June 30, 1997, and June 30, 1996........................................ 32
Consolidated Statements of Cash Flows--
Years ended June 30, 1998, June 30, 1997 and June 30, 1996......................................... 33
Consolidated Statements of Stockholder's Equity--
Years ended June 30, 1998, June 30, 1997, and June 30, 1996........................................ 34
Schedule II--Report of the Independent Auditors
Valuation and Qualifying Accounts and Reserves--
Years ended June 30, 1998, June 30, 1997, and June 30, 1996........................................ 55
</TABLE>
29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
AAF-McQuay Inc.
We have audited the accompanying consolidated balance sheets of AAF-McQuay Inc.
and subsidiaries as of June 30, 1998 and June 30, 1997, and the related
consolidated statements of operations, cash flows and stockholder's equity for
each of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AAF-McQuay Inc.
and subsidiaries at June 30, 1998 and June 30, 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1998, in conformity with generally accepted accounting
principles.
[SIGNATURE]
Baltimore, Maryland
September 15, 1998
30
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 9,697 $ 10,827
Accounts receivable..................................................................... 238,613 233,405
Inventories............................................................................. 124,793 124,192
Other current assets.................................................................... 8,423 6,858
---------- ----------
Total current assets.................................................................. 381,526 375,282
Property, plant and equipment, net........................................................ 145,305 150,214
Cost in excess of net assets acquired and other identifiable intangibles, net............. 250,650 266,784
Other assets and deferred charges......................................................... 19,397 18,088
---------- ----------
Total assets.......................................................................... $ 796,878 $ 810,368
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings................................................................... $ 60,262 $ 58,703
Current maturities of long-term debt.................................................... 28,531 12,091
Accounts payable, trade................................................................. 120,775 116,877
Accrued warranty........................................................................ 14,947 12,979
Accrued employee compensation........................................................... 35,918 34,164
Other accrued liabilities............................................................... 52,795 52,205
---------- ----------
Total current liabilities............................................................. 313,228 287,019
Long-term debt............................................................................ 177,083 217,030
Deferred income taxes..................................................................... 48,750 52,611
Other liabilities......................................................................... 51,977 49,427
---------- ----------
Total liabilities..................................................................... 591,038 606,087
Stockholder's equity:
Preferred stock ($1 par value; 1,000 shares authorized, none issued).................... -- --
Common stock ($100 par value; 8,000 shares authorized, 2,497 shares issued and
outstanding).......................................................................... 250 250
Additional paid-in capital.............................................................. 179,915 179,915
Retained earnings....................................................................... 33,185 29,074
Foreign currency translation adjustment................................................. (7,510) (4,958)
---------- ----------
Total stockholder's equity............................................................ 205,840 204,281
---------- ----------
Total liabilities and stockholder's equity................................................ $ 796,878 $ 810,368
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
31
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................................................. $ 965,749 $ 947,933 $ 901,395
Cost of sales.............................................................. 705,615 694,596 645,149
----------- ----------- -----------
Gross profit............................................................... 260,134 253,337 256,246
Operating expenses:
Selling, general and administrative...................................... 213,176 201,157 186,072
Amortization of intangible assets........................................ 11,657 11,584 13,478
Restructuring charges.................................................... 7,578 -- --
----------- ----------- -----------
232,411 212,741 199,550
----------- ----------- -----------
Income from operations..................................................... 27,723 40,596 56,696
Interest expense, net...................................................... 25,131 25,961 24,957
Other (income) expense, net................................................ (6,454) 616 (3,219)
----------- ----------- -----------
Income before income taxes and extraordinary item.......................... 9,046 14,019 34,958
Income taxes............................................................... 4,720 6,906 18,423
Minority interest in earnings.............................................. 215 476 --
----------- ----------- -----------
Income before extraordinary item........................................... 4,111 6,637 16,535
Extraordinary item, net of tax............................................. -- -- (1,635)
----------- ----------- -----------
Net income................................................................. $ 4,111 $ 6,637 $ 14,900
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
32
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income............................................................... $ 4,111 $ 6,637 $ 14,900
Adjustments to reconcile to cash from operating activities:
Extraordinary item....................................................... -- -- 2,681
Restructuring charges.................................................... 7,578 -- --
Depreciation and amortization............................................ 26,946 25,567 25,809
Foreign currency transaction (gains) losses.............................. 385 413 (1,444)
Gain on the sale of business............................................. (6,626) -- --
Deferred income taxes.................................................... (3,861) 1,022 7,642
Changes in operating assets and liabilities:
Accounts receivable.................................................... (5,208) (11,981) (25,670)
Inventories............................................................ (601) (10,420) 249
Other assets/liabilities, net.......................................... 244 (6,339) 5,834
Accounts payable and other accrued liabilities......................... 4,488 21,324 (2,039)
----------- ----------- -----------
Net cash from operating activities......................................... 27,456 26,223 27,962
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures..................................................... (23,922) (15,941) (14,765)
Acquisitions of businesses............................................... -- (5,344) (34,903)
Proceeds from the sale of business....................................... 17,133 -- --
----------- ----------- -----------
Net cash from investing activities......................................... (6,789) (21,285) (49,668)
Cash flows from financing activities:
Net borrowing (repayment) under short-term borrowing arrangements........ 1,559 (6,835) (915)
Payments on long-term debt............................................... (23,507) (10,248) (102,894)
Proceeds from issuance of long-term debt................................. -- 2,000 135,988
Payment of debt issuance cost............................................ -- -- (5,104)
----------- ----------- -----------
Net cash from financing activities......................................... (21,948) (15,083) 27,075
Effect of exchange rate changes on cash.................................... 151 148 (787)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents....................... (1,130) (9,997) 4,582
Cash and cash equivalents at beginning of period........................... 10,827 20,824 16,242
----------- ----------- -----------
Cash and cash equivalents at end of period................................. $ 9,697 $ 10,827 $ 20,824
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
33
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
COMMON PAID-IN RETAINED TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
----------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance July 1, 1995................................... $ 250 $ 179,915 $ 7,537 $ 1,126 $ 188,828
Net income............................................. -- -- 14,900 -- 14,900
----- ---------- --------- ----------- ----------
Currency translation adjustment........................ -- -- -- (4,445) (4,445)
----- ---------- --------- ----------- ----------
Balance June 30, 1996.................................. 250 179,915 22,437 (3,319) 199,283
Net income............................................. -- -- 6,637 -- 6,637
Currency translation adjustment........................ -- -- -- (1,639) (1,639)
----- ---------- --------- ----------- ----------
Balance June 30, 1997.................................. 250 179,915 29,074 (4,958) 204,281
----- ---------- --------- ----------- ----------
Net income............................................. -- -- 4,111 -- 4,111
Currency translation adjustment........................ -- -- -- (2,552) (2,552)
----- ---------- --------- ----------- ----------
Balance June 30, 1998.................................. $ 250 $ 179,915 $ 33,185 $ (7,510) $ 205,840
----- ---------- --------- ----------- ----------
----- ---------- --------- ----------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
34
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
The accompanying financial statements include the accounts of AAF-McQuay
Inc. (the Company), a wholly-owned subsidiary of AAF-McQuay Group, Inc., and its
subsidiaries. AAF-McQuay Group, Inc. is a wholly-owned subsidiary of O.Y.L.
Industries Berhad ("OYL"). In December 1995, AAF-McQuay Group, Inc. contributed
all of its ownership interest in AAF-McQuay Holdings, Inc. to the Company. AAF-
McQuay Holdings, Inc. holds minority investments in certain companies.
The Company is a worldwide manufacturer and marketer of commercial air
conditioning and refrigeration and air filtration products and systems primarily
for commercial, institutional and industrial customers. In December 1995, the
Company entered the industrial refrigeration business through the acquisition of
J&E Hall, a United Kingdom's integrated provider of industrial refrigeration and
freezing equipment. The Company maintains production facilities in nine
countries and its products are sold in over 80 countries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All intercompany transactions and balances have
been eliminated. The accompanying financial statements reflect the financial
results of the Company for the fiscal years ended June 30, 1998, June 30, 1997
and June 30, 1996. The Company's fiscal year end is the Saturday closest to June
30 and, for clarity of presentation in the consolidated financial statements,
fiscal years are shown to begin on July 1 and end on June 30.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company invests cash in excess of operating requirements in short-term
time deposits, money market instruments, or commercial paper. These investments
have original maturities of less than three months and are considered cash
equivalents for financial reporting purposes.
INVENTORIES
Inventories are valued at the lower of cost or market at June 30, 1998 and
June 30, 1997. Cost is determined by the last-in, first-out (LIFO) method for
U.S. inventories, (57% and 62%, respectively), and the first-in, first-out
(FIFO) method for the Company's foreign subsidiaries (43% and 38%,
respectively).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are depreciated using the straight-line method
over their estimated useful lives as follows:
<TABLE>
<S> <C>
20 to 40
Buildings.................................................... years
Machinery and Equipment...................................... 3 to 12 years
</TABLE>
35
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Maintenance and repairs are charged to operations when incurred, while
expenditures which have the effect of extending the useful life of an asset are
capitalized.
COST OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
In March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED FOR OR
OBTAINED FOR INTERNAL USE. SOP 98-1 requires that qualifying computer software
costs incurred during the application development stage be capitalized and
amortized over the software's estimated useful life. The Company adopted the SOP
98-1 requirements effective July 1, 1997. Software costs are amortized on a
straight line basis over periods of 3 to 5 years.
INTANGIBLE ASSETS
The excess of cost over fair values of net assets acquired are being
amortized on a straight-line basis over forty years. Other identifiable
intangibles acquired include trademarks and tradenames; technical drawings and
technology; and assembled work force, which are being amortized on a
straight-line basis over forty, fifteen and ten years, respectively. Effective
April 1, 1997, the Company changed its estimate for the useful life of goodwill,
tradenames and trademarks from 25 to 40 years to better reflect the estimated
periods over which economic benefits will be realized.
On a periodic basis, the Company evaluates the carrying value of its
intangible assets to determine if the facts and circumstances suggest that
intangible assets may be impaired. If this review indicates that intangible
assets may not be recoverable, as determined based on the undiscounted cash flow
of the entity acquired over the remaining amortization period, the Company's
carrying value of intangible assets is reduced by the estimated shortfall of
cash flows.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company principally in the
management of its interest rate and foreign currency exposures. The Company does
not enter into speculative derivative transactions.
The differential between interest rate cap premiums due and amounts
receivable under interest rate cap agreements are recognized as yield
adjustments to interest expense over the term of the related debt.
Gains and losses on foreign exchange forward contracts are recognized in
income and offset the foreign exchange gains and losses on the underlying
foreign currency transactions.
FOREIGN CURRENCIES
Assets and liabilities of the Company's subsidiaries outside the U.S. are
translated into U.S. dollars at the exchange rates in effect at the end of the
period. Revenue and expense accounts are translated at a weighted average of
exchange rates in effect during the period. Translation adjustments that arise
from translating a foreign subsidiary's financial statements from local currency
(the functional currency) to U.S. dollars are reflected as a separate component
of stockholder's equity.
Transaction gains and losses that arise from exchange rate changes on
transactions denominated in a currency other than the local currency are
included currently in the results of operations. The Company
36
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized net foreign currency transaction (gains) losses of $385,000,
$425,000, and ($1,444,000) for the fiscal years ended June 30, 1998, June 30,
1997, and June 30, 1996, respectively.
REVENUE RECOGNITION
Revenues and costs are generally recognized as products are shipped or
services are rendered. Revenues and costs associated with long-term contracts
are recognized on the percentage-of-completion method. Provisions are recorded
for losses on contracts whenever it is estimated that costs will exceed contract
value. Unbilled revenue recognized on long-term contracts is included in
accounts receivable in the accompanying Consolidated Balance Sheets.
PRODUCT WARRANTIES
Product warranties are provided as charges to current expense for estimated
normal warranty costs and, if applicable, for specific performance issues known
to exist on products sold. The expenses estimated to be incurred are provided at
the time of sale, based primarily upon estimates derived from experience.
Warranty costs on some purchased parts and components are partially reimbursed
to the Company by supplying vendors. Estimated obligations beyond one year are
classified as other long-term liabilities. Revenue from the sale of extended
warranty and related service contracts is deferred and amortized over the
respective contract life on a straight-line basis.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs were approximately $10.0 million, $10.6
million, and $8.2 million for the fiscal years ended June 30, 1998, June 30,
1997, and June 30, 1996, respectively, and are included in selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations.
STOCK-BASED COMPENSATION
As described in Note 12, the Company has elected to follow the accounting
provisions of Accounting Principles Board Opinion No. 25 for stock-based
compensation and to furnish the pro forma disclosures required under Statement
of Financial Accounting Standards No. 123.
INCOME TAXES
The Company uses the liability method for financial accounting and reporting
of income taxes. Under the liability method, deferred tax assets and liabilities
are determined based on the difference between financial statement carrying
amounts and the tax bases of assets and liabilities. These differences are
measured at the enacted tax rates that will be in effect when these differences
reverse.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME. This statement requires the reporting of the components of
Other Comprehensive Income (i.e. non-owner changes to stockholders' equity).
This pronouncement is effective for fiscal years beginning after December 15,
1997.
37
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION which established standards for reporting
information about operating segments. The Company is required to adopt this
standard effective June 30, 1999.
In February 1998, the FASB issued Statement No. 132, EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. Statement 132 addresses
disclosure issues only and does not change the measurement or recognition
provisions specified in other various Statements. Statement 132 is effective for
fiscal years beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND FOR HEDGING ACTIVITIES which requires that an entity record all
derivatives in the statement of financial position at their fair value. It also
requires changes in the fair value of derivatives to be recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company is required to adopt this standard for the
fiscal year beginning July 1, 1999.
The Company continues to evaluate the adoption of these new pronouncements.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
Accounts receivable, trade...................................................... $ 237,343 $ 233,498
Accounts receivable, other...................................................... 8,631 7,536
---------- ----------
245,974 241,034
Less allowance for doubtful receivables......................................... 7,361 7,629
---------- ----------
$ 238,613 $ 233,405
---------- ----------
---------- ----------
</TABLE>
The Company manufactures and sells heating, ventilating, air conditioning,
refrigeration and air filtration products to companies in various industries
with the most significant sales concentration being in the construction
industry. The Company performs periodic evaluations of its customers' financial
condition and generally does not require collateral. For domestic equipment
sales, it is the Company's practice to attach liens in the event of non-payment,
when such recourse is available. Trade receivables generally are due within
30-90 days.
38
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Inventories consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
FIFO cost:
Raw materials................................................................... $ 46,513 $ 51,393
Work-in-process................................................................. 33,493 27,618
Finished goods.................................................................. 40,961 42,109
---------- ----------
120,967 121,120
LIFO adjustment................................................................. 3,826 3,072
---------- ----------
$ 124,793 $ 124,192
---------- ----------
---------- ----------
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
Land............................................................................ $ 9,635 $ 10,962
Buildings....................................................................... 60,396 65,069
Machinery and equipment......................................................... 123,502 111,129
---------- ----------
193,533 187,160
Less accumulated depreciation and amortization.................................. 48,228 36,946
---------- ----------
$ 145,305 $ 150,214
---------- ----------
---------- ----------
</TABLE>
At June 30, 1998, substantially all property, plant and equipment are encumbered
by various debt obligations of the Company.
6. INTANGIBLE ASSETS
Intangible assets consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
Cost in excess of net assets acquired........................................... $ 155,463 $ 159,977
Other intangibles:
Technology.................................................................... 14,260 14,304
Trademarks.................................................................... 61,161 61,161
Drawings...................................................................... 54,000 54,000
Workforce..................................................................... 18,417 18,417
---------- ----------
Total other intangibles....................................................... 147,838 147,882
Less accumulated amortization................................................. 52,651 41,075
---------- ----------
$ 250,650 $ 266,784
---------- ----------
---------- ----------
</TABLE>
39
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
In July 1994, the Company entered into a Revolving Credit, Letter of Credit,
and Term Loan Agreement (Bank Agreement). In February 1996, an amendment to the
Bank Agreement was executed in which the lenders consented to the issuance of
the $125 million Senior Unsecured Notes and an $80 million Receivables
Securitization Program. The February 1996 amendment significantly restated Bank
Agreement commitment amounts, repayment terms, interest rates, and security
provisions. In August 1996, the Company terminated the Receivables
Securitization program and increased the Revolver commitment portion of the Bank
Agreement from $35 million to $100 million. In August of 1997, the Company
amended its Bank Agreement and reduced the Revolver commitment portion from $100
million to $80 million. The Revolving Credit portion of the Bank Agreement
("Revolver"), as amended in September 1998, expires in February, 2001 and
provides for maximum aggregate short-term borrowings of $80 million and up to
$25 million for letters of credit. However, the combined amount of short-term
borrowings plus letters of credit cannot exceed $80 million. Use of the Revolver
is subject to the Company's availability (as defined in the Bank Agreement) and
is based on the Company's level of domestic receivables and inventories. At June
30, 1998, borrowings of $25 million were outstanding under this facility, $1.6
million in letters of credit were issued and outstanding and the Company had
approximately $53.4 million in additional borrowing availability. The Company is
required to pay a commitment fee of 1/2% on the unused portion of the Revolver.
Interest on Revolver advances is generally payable quarterly based, at the
Company's option, on (1) the higher of the bank prime rate or a rate based upon
the Federal Funds Rate plus a specified premium, or (2) the average rate at
which Eurodollar deposits are offered to prime banks in the London interbank
market (LIBOR) plus a specified premium. The interest rate premiums are
determined by an interest rate matrix which is based on certain quarterly
financial ratios as described in the Bank Agreement. As of June 30, 1998, the
Company's interest rate premiums were LIBOR + 1.875% or prime + 0.875% based on
the applicable financial ratios. The interest rate premiums are subject to a
0.125% increase or may decrease by as much as 0.875%, depending on the
applicable quarterly financial ratios. At June 30, 1998, the Company's borrowing
rate under the Bank Agreement, was approximately 7.50%. The average effective
interest rate under the Bank Agreement for the fiscal year ended June 30, 1998,
was approximately 7.60%.
At June 30, 1998 certain of the Company's foreign subsidiaries had available
lines of credit with foreign banks of approximately $64 million which may be
drawn as needed at an average interest rate of approximately 7.0%. Outstanding
borrowings against international lines of credit amounted to approximately $35.3
million and $25.2 million at June 30, 1998 and June 30, 1997, respectively. In
addition, certain of the Company's foreign subsidiaries have non-borrowing bank
facilities (letters of credit, guarantees, performance bonds, etc.) totaling
$18.0 million as of June 30, 1998 and $25 million as of June 30, 1997 of which
approximately $15 million was used at June 30, 1998 and $19.2 million was used
at June 30, 1997.
The Company also has available letter of credit facilities totaling $25
million which are supported by a letter of credit from OYL and were fully
utilized at June 30, 1998 and June 30, 1997. The commitments made under these
facilities expire in March of 1999, but may be extended annually for successive
one year periods with the consent of OYL and the banks providing the facilities.
The weighted average effective interest rate on short-term borrowings was
7.2% at June 30, 1998 and 7.1% at June 30, 1997.
40
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
Senior Term Loans......................................................................... $ 49,422 $ 65,000
Promissory Note due May 2, 1999, bearing interest at 6%, and secured by a letter of 11,500 11,500
credit..................................................................................
Senior Unsecured Notes due February 15, 2003, bearing interest at 8.875%.................. 125,000 125,000
Other issues.............................................................................. 19,692 27,621
---------- ----------
205,614 229,121
Less: Current maturities.................................................................. (28,531) (12,091)
---------- ----------
$ 177,083 $ 217,030
---------- ----------
---------- ----------
</TABLE>
The term loan portion of the Bank Agreement consists of Senior Term Loans
that are a direct obligation of the Company. These term loans are secured by
substantially all the domestic assets of the Company and its domestic
subsidiaries and a portion of the capital stock of certain foreign subsidiaries.
The Senior Term Loans are payable in quarterly installments of varying amounts
through March 2001. Interest is generally payable quarterly based on the same
interest rate structure as the Revolver.
The Bank Agreement contains covenants that, among other things, impose
limitations on incurrence of indebtedness, capital expenditures, transactions
with affiliates, mergers and the disposition of assets, investments by the
Company, and transactions involving the capital of the Company, including
payment of any dividends. In addition, the Bank Agreement contains financial
covenants (as amended in September of 1998 retroactive to June 30, 1998)
relating to net worth, leverage ratio, interest coverage, and fixed charge
coverage. At June 30, 1998 and June 30, 1997 the Company was in compliance with
the amended financial covenants.
The Bank Agreement also contains provisions requiring accelerated payments.
The generation of cash resulting from, among other things, the sale of any
material asset, collection of any special receipt (as defined) or any excess
cash flow (as defined) require certain accelerated payments. Accelerated
payments of $7.4 million were required during the fiscal year ended June 30,
1998. No accelerated payments were required for the year ended June 30, 1997.
The $11.5 million, 6% Promissory Note was issued in connection with the May
2, 1994 acquisition of the Company and made payable to a bank, as paying agent
for the benefit of certain former stockholders of the Company. In July 1998, the
Company negotiated a settlement of the indemnification agreement with certain
former stockholders of the Company. As a result, the indemnification agreement
was terminated and the Company made a payment of $10.5 million plus accrued
interest, which satisfied all obligations under the $11.5 million Promissory
Note.
In February 1996, the Company issued the 8.875% Senior Unsecured Notes
("Senior Notes") with the proceeds being used to reduce indebtedness under the
Bank Agreement. The Senior Notes were issued under an indenture agreement which,
among other things, contains restrictive covenants relating to dividend
distributions, additional debt, sale of assets, transactions with affiliates,
guarantees and investments by the Company and its subsidiaries. The Senior Notes
are not redeemable prior to maturity (February 15, 2003) and are not subject to
any sinking fund requirement.
41
<PAGE>
AAF-MCQUAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
Included in other issues of long term debt are various term loans incurred
by certain foreign subsidiaries, as well as obligations under Industrial Revenue
Bonds and mortgage notes. The foreign term loans are secured by certain assets
of the issuing foreign subsidiary and contain various repayment terms ranging
from 5 to 15 years. The outstanding balance of these foreign term loans was $9.3
million and $11.5 million at June 30, 1998 and June 30, 1997, respectively.
The Company paid cash interest of $24.0 million, $24.8 million, and $21.7
million for the fiscal years ended June 30, 1998, June 30, 1997, and June 30,
1996, respectively.
Maturities of long-term debt during each of the next five fiscal years
subsequent to June 30, 1998 are as follows (dollars in millions): 1999, $28.5 ;
2000, $22.3; 2001, $20.9; 2002, $1.1; 2003, $125.9.
8. FINANCIAL INSTRUMENTS
The Company operates internationally and borrows at floating interest rates,
giving rise to exposure to market risks from changes in foreign exchange rates
and interest rates. The Company may utilize derivatives to reduce those risks.
The notional amounts of derivatives noted below do not represent amounts
exchanged by the parties and, thus, are not a measure of the exposure of the
Company through its use of derivatives. The Company does not hold or issue
derivative financial instruments for trading purposes.
INTEREST RATE RISK MANAGEMENT: The Company may, at times, seek to limit the
impacts of rising interest rates on its variable rate debt through the use of
interest rate derivative instruments. In December of 1995, the Company entered
into a new amortizing interest rate swap agreement with an initial notional
amount of $100 million. Under this agreement the Company payed an interest rate
equal to LIBOR when LIBOR was greater than 4.75% or less than 6.6%; otherwise,
the Company payed an interest rate of 6.6%. This swap agreement was terminated
in June 1996. The gain on early termination of the swap agreement was not
material. There were no interest rate derivative transactions completed during
the fiscal years ended June 30, 1998 and June 30, 1997.
FOREIGN CURRENCY MANAGEMENT: The Company enters into short-term foreign
exchange contracts to hedge its exposure to currency fluctuations affecting
certain foreign currency denominated trade payables and certain intercompany
debt of its foreign subsidiaries. The notional amount of foreign exchange
forward contracts outstanding at June 30, 1998 and June 30, 1997 was
approximately $36.1 million and $32.2 million, respectively. The U.S. dollar
equivalent notional amount of these foreign exchange forward contracts by
applicable foreign currency at June 30, 1998 and June 30, 1997 was as follows:
Canadian dollars, $4.2 million and $4.2 million; Singapore dollars $2.3 million
and $3.1 million; German marks $2.5 million and $3.1 million; Italian lira $5.1
million and $4.3 million; French francs $11.7 million and $13.4 million; Dutch
guilders $4.5 million and $0.9 million; and various other currencies $5.8
million and $3.2 million.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to derivative financial instruments. The
Company monitors the credit worthiness of the counterparties and presently does
not anticipate nonperformance by the counterparties. The credit exposure of
derivative financial instruments is represented by the fair value of contracts
with a positive fair value.
42
<PAGE>
FASB Statement No. 107, DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL
INSTRUMENTS, defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties. The carrying values reported in the balance sheets for cash and cash
equivalents, accounts receivable and short-term borrowings approximate their
respective values. The fair value of the Company's Senior Unsecured Notes is
estimated using a quoted market price. The carrying amount of all other
long-term debt approximates fair value. The carrying amount of the Company's
long-term debt at June 30, 1998 of $205.6 million approximates fair value. The
aggregate carrying value of the Company's long-term debt at June 30, 1997 was
$229.1 million and approximates fair value. The fair values of the Company's
foreign exchange forward contracts are based on current settlement values and
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing. At
June 30, 1998 and June 30, 1997, the net carrying amount of these contracts
approximates their fair value.
9. RESTRUCTURING
In the fourth quarter of 1998, the Company commenced a restructuring of its
Filtration Products segment and recorded a restructuring charge of $7.3 million.
In addition a $360,000 charge was recorded in the first quarter of 1998
primarily related to severance. Components of the $7.3 million restructuring
charge include fixed asset write downs, the closure of the Reed manufacturing
facility in Louisville, Kentucky, which is now held for resale, and severance
accruals. The plant closure and fixed asset write downs to fair value resulted
in a charge of $3.4 million. Approximately 250 positions were eliminated with a
corresponding severance accrual of $2.5 million recorded. The remaining
restructuring charges primarily relate to the expenses related to the attempted
sale of the environmental products division. Subsequently, the Company has
decided to retain this division and has implemented the restructuring plan to
reduce costs and strengthen competitive positions. Management expects this
restructuring plan to be completed in fiscal year 1999.
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at June 30, 1998 and June 30,
1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................................................. $ 10,019 $ 9,816
Tax over book fixed assets basis............................................................. 718 758
Accrual for pension and retirement benefits.................................................. 4,582 5,527
Accrual for other expenses................................................................... 22,097 20,641
Tax credit carryforwards..................................................................... 770 1,605
Other........................................................................................ 2,730 3,456
--------- ---------
Total deferred tax assets.................................................................... 40,916 41,803
Valuation allowance.......................................................................... (17,284) (18,670)
--------- ---------
Net deferred tax assets...................................................................... $ 23,632 $ 23,133
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Unrepatriated earnings of foreign subsidiaries............................................... $ 2,972 $ 3,774
Book over tax fixed assets basis............................................................. 18,959 23,564
Book over tax intangible asset basis......................................................... 34,704 35,319
Book over tax inventory basis................................................................ 8,983 7,557
Other........................................................................................ 6,764 5,530
--------- ---------
Total deferred tax liabilities............................................................... 72,382 75,744
--------- ---------
Net deferred tax liabilities................................................................. $ 48,750 $ 52,611
--------- ---------
--------- ---------
</TABLE>
Deferred tax assets for net operating loss carryforwards and other items at
June 30, 1998 and June 30, 1997 includes approximately $15 million and $16
million, respectively, related to periods prior to the acquisition by OYL which
have been offset by a valuation allowance. If realized, the benefit of these
deferred tax assets will be applied to reduce goodwill related to the
acquisition.
Significant components of the provision for income taxes are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Federal taxes--Current............................................................. $ 2,485 $ 986 $ 3,650
Federal taxes--Deferred............................................................ (2,705) 1,095 6,199
State taxes........................................................................ (100) 297 1,024
Foreign taxes--Current............................................................. 4,241 3,592 6,107
Foreign taxes--Deferred............................................................ 799 936 1,443
----------- ----------- ---------
Total.............................................................................. $ 4,720 $ 6,906 $ 18,423
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
During the fiscal years ended June 30, 1998, June 30, 1997, and June 30,
1996, the Company paid income taxes of approximately $9.5 million, $5.9 million,
and $8.7 million, respectively. A reconciliation between the Company's reported
tax provision and the tax provision computed based on the U.S. statutory rate is
as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Statutory U.S. Federal income tax provision........................................ $ 3,166 $ 4,907 $ 12,237
Nondeductible goodwill amortization................................................ 1,216 1,224 1,871
Foreign tax credits not utilized................................................... -- 337 2,375
State taxes, net of federal benefit................................................ 200 297 1,024
Other.............................................................................. 138 141 916
----------- ----------- ---------
Reported tax provision............................................................. $ 4,720 $ 6,906 $ 18,423
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
At June 30, 1998, the Company has net operating loss and tax credit
carryforwards of approximately $27.3 million and $1.0 million, respectively, in
the United States and various foreign countries. Approximately $3.3 million of
the net operating loss carryforwards and $1.0 million of the tax credit
carryforwards expire in fiscal years 1999 through 2012. The remaining net
operating loss carryforwards can be carried forward indefinitely.
11. EMPLOYEE BENEFIT PLANS
The Company has defined benefit pension plans in effect for substantially
all of its domestic hourly employees and certain of its foreign employees.
Benefits are computed using formulas which are generally
44
<PAGE>
based on age and years of service. Plan assets consist primarily of common
stock, insurance contracts and government obligations. The Company's method of
funding pension costs is to contribute amounts to the plans sufficient to meet
minimum funding requirements, plus such amounts as the Company may determine to
be appropriate from time to time.
Pension expense for the Company's domestic defined benefit pension plans for
the fiscal years ended June 30, 1998, June 30, 1997, and June 30, 1996 includes
the following components (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Service cost........................................................................ $ 301 $ 309 $ 301
Interest cost on the projected benefit obligation................................... 1,936 1,912 1,916
Return on plan assets............................................................... (3,785) (3,031) (4,144)
Net amortization and deferral....................................................... 1,458 977 2,431
----------- ----------- -----------
Total pension expense (benefit)..................................................... $ (90) $ 167 $ 504
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Pension expense for the Company's foreign pension plans for the fiscal years
ended June 30, 1998, June 30, 1997, and June 30, 1996 includes the following
components (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
--------- ----------- -----------
<S> <C> <C> <C>
Service cost....................................................................... $ 1,914 $ 2,816 $ 950
Interest cost on the projected benefit obligation.................................. 4,741 3,769 1,656
Return on plan assets.............................................................. (17,101) (5,101) (1,820)
Amortization of (gain) loss........................................................ 11,500 839 (18)
--------- ----------- -----------
Total pension expense.............................................................. $ 1,054 $ 2,323 $ 768
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
The funded status of the domestic defined benefit plans as of June 30, 1998
and June 30, 1997 is presented below (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
-------------------------- --------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Vested benefits........................................... $ 14,846 $ 11,337 $ 13,645 $ 10,859
Nonvested benefits........................................ 1,187 297 589 257
------------ ------------ ------------ ------------
Accumulated benefit obligation and projected benefit
obligation.............................................. 16,033 11,634 14,234 11,116
Fair value of plan assets................................. 18,761 8,052 16,884 7,552
------------ ------------ ------------ ------------
Plan assets (in excess) less than projected benefit
obligation.............................................. (2,728) 3,582 (2,650) 3,564
Unrecognized net gain..................................... 2,990 1,447 3,457 1,719
------------ ------------ ------------ ------------
Pension liability included in balance sheet............... $ 262 $ 5,029 $ 807 $ 5,283
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
45
<PAGE>
The funded status of the Company's foreign defined benefit plans, including
termination indemnities, as of June 30, 1998 and June 30, 1997 is presented
below (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------ ------------- ------------ -------------
Vested benefits........................................... $ 61,044 $ 896 $ 43,816 $ 782
Nonvested benefits........................................ 495 -- 314 --
------------ ------ ------------ ------
Accumulated benefit obligation............................ 61,539 896 44,130 782
Additional benefits related to future compensation
levels.................................................. 19,522 463 15,311 390
------------ ------ ------------ ------
Projected benefit obligation.............................. 81,061 1,359 59,442 1,172
Fair value of plan assets................................. 86,093 -- 57,752 --
------------ ------ ------------ ------
Plan assets (in excess) less than projected benefit
obligation.............................................. (5,032) 1,359 1,690 1,172
Unrecognized net gain/(loss).............................. (4,303) (53) (8,395) (55)
------------ ------ ------------ ------
Pension (asset) liability included in balance sheet....... $ (9,335) $ 1,306 $ (6,705) $ 1,227
------------ ------ ------------ ------
------------ ------ ------------ ------
</TABLE>
The weighted average discount rate used to measure the projected obligation
for the domestic plans was 7.00% and 8.00% as of June 30, 1998 and June 30,
1997, respectively. The computations above for domestic plans assumes an
expected long-term rate of return on assets of 9% for each period presented.
The foreign plans included in the preceding tables used weighted average
discount rates ranging from 5.5% to 8.5% at June 30, 1998 and June 30, 1997. The
assumed rate of increase in future compensation levels ranged from 4.0% to 5.0%
at June 30, 1998 and June 30, 1997. The expected long-term rate of return on
assets was 7.0% to 9.0% for the fiscal years ended June 30, 1998, and June 30,
1997.
The Company has a defined contribution plan that primarily covers domestic
salaried employees. Company contributions to the plan are based on employee
compensation. The Company expensed $1,111,000, $1,071,000, and $1,411,000 under
this plan during the fiscal years ended June 30, 1998, June 30, 1997, and June
30, 1996, respectively.
The Company also sponsors a 401(k) defined contribution plan that primarily
covers domestic salaried employees. Participants may contribute a percentage of
their compensation to the plan. Contributions are matched by the Company with
certain limitations. During the fiscal years ended June 30, 1998, June 30, 1997,
and June 30, 1996, the Company expensed $1,066,000, $1,111,000, and $1,094,000,
respectively, related to this plan.
The Company sponsors domestic defined benefit health care plans for certain
salaried and nonsalaried employees whereby certain health care and life
insurance benefits are provided on retirement. The benefits are provided only
for a frozen group of active employees and retirees. For these plans, medical
trend rates assume escalation of 9.5 percent decreasing gradually for four years
to the ultimate medical trend rate of 5.5 percent. The aggregate increase in the
accumulated postretirement benefit obligation and the service cost plus interest
for the domestic plan as of and for the fiscal year ended June 30, 1998 assuming
a one percentage point increase in the medical trend rate in each year is
$-488,000 and $74,000, respectively. The weighted average discount rate used in
determining the June 30, 1998 and June 30, 1997 accumulated postretirement
benefit obligation was 7.0% and 8.0%, respectively. The domestic plans are
unfunded.
The Company also sponsors a foreign defined benefit health care plan for
certain salaried and nonsalaried employees whereby certain health care and life
insurance benefits are provided on retirement.
46
<PAGE>
For this plan, medical trend rates assume escalation of 7 percent decreasing
ratably to the ultimate medical trend rate of 4.5 percent in the year 2010. The
accumulated postretirement benefit obligation and service cost plus interest
would not increase significantly assuming a one percent increase in the medical
trend rate as of and for the fiscal year ended June 30, 1998. The weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% at June 30, 1998 and June 30, 1997. The foreign plan is also
unfunded.
Postretirement benefit expense for the Company's domestic defined benefit
health care plans for the fiscal years June 30, 1998, June 30, 1997, and June
30, 1996 includes the following components (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Service cost........................................................................ $ 256 $ 196 $ 218
Interest cost on the accumulated postretirement benefit obligation.................. 400 406 410
Net amortization and deferral....................................................... (29) (42) (11)
----- ----- -----
Postretirement benefit expense...................................................... $ 627 $ 560 $ 617
----- ----- -----
----- ----- -----
</TABLE>
Postretirement benefit expense for the Company's foreign defined benefit
healthcare plans for the fiscal years ended June 30, 1998, June 30, 1997, and
June 30, 1996 includes the following components (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest cost on the accumulated postretirement benefit obligation.................. $ 65 $ 60 $ 57
Net amortization and deferral....................................................... (20) (20) (20)
--- --- ---
Postretirement benefit expense...................................................... $ 45 $ 40 $ 37
--- --- ---
--- --- ---
</TABLE>
The funded status of both domestic and foreign defined benefit health care
plans at June 30, 1998 and June 30, 1997 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
DOMESTIC FOREIGN DOMESTIC FOREIGN
PLANS PLAN PLANS PLAN
----------- --------- ----------- ---------
Accumulated postretirement benefit obligation:
Retirees................................................................. $ 2,784 $ 608 $ 2,689 $ 718
Fully eligible active plan participants.................................. 793 -- 762 --
Active plan participants................................................. 2,352 -- 1,844 --
Unrecognized gain........................................................ 515 416 1,038 442
----------- --------- ----------- ---------
Accrued postretirement benefit obligation................................ $ 6,444 $ 1,024 $ 6,333 $ 1,160
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
12. STOCK-BASED COMPENSATION
In 1998, the Company adopted a Stock Option Plan which provides for the
grant of non-qualified stock options to certain members of management and key
employees to purchase the common stock of the Company's parent AAF-McQuay Group
Inc. which has 1,000 shares outstanding. The Company has elected to follow APBO
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, in accounting for its
stock-based compensation.
Under the stock option plan, options to purchase common stock may be granted
until 2007. Options may be granted at fair market value at the date of the grant
or at fair market value at the date of grant discounted for a lack of
marketability and are exerciseable up to 10 years after the date of grant unless
47
<PAGE>
terminated sooner or in the event of a public offering of the Company's shares,
two years following the later of the public offering or the date the grantee
becomes vested in that portion of the option. Generally the stock options will
vest and thus can be exercised at 33 1/3% on each of the first three
anniversaries of the date of the grant or 100% at termination of employment
because of disability, death or wrongful termination or change in ownership
control.
The grants made during fiscal year 1998 received variable accounting
treatment under APB No. 25, and accordingly, the Company expensed $1.1 million
during the year ended June 30, 1998. The Company anticipates the granting of
additional options under the stock option plan during fiscal year 1999. The
related impact to the Statement of Operations, if any, will be based on an
independent valuation of the Company at fiscal year ends.
As of June 30, 1998, there were stock options for 38.3 shares of AAF-McQuay
Group, Inc. issued and outstanding under the plan. Transactions are summarized
as follows:
<TABLE>
<CAPTION>
STOCK WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Outstanding at June 30, 1997.......................................................... 0 --
Granted, immediately vested........................................................... 22.7 $ 194,411
Granted, vested over three years...................................................... 15.6 203,214
--- --------
Outstanding at June 30, 1998.......................................................... 38.3 $ 197,997
Shares exercisable at June 30, 1998................................................... 22.7 $ 194,411
</TABLE>
In electing to follow APBO No. 25 for expense recognition purposes, the
Company is obligated to provide the expanded disclosures required under SFAS No.
123 for stock-based compensation including, if materially different from
reported results, disclosure of pro forma net income had compensation expense
been measured under the fair value recognition provisions of SFAS No. 123. The
weighted-average fair values at date of grant for options granted in 1998 was
$204,800 and was estimated using the Black-Scholes option valuation model with
the following weighted average assumptions:
<TABLE>
<S> <C>
Expected life in years................................................. 7.0
Interest Rate.......................................................... 6.0%
Dividend Yield......................................................... 0%
</TABLE>
The Company's pro forma net income for the year ended June 30, 1998 is $3.2
million. For pro forma disclosure, stock-based compensation is amortized to
expense on a straight line basis over the vesting period.
13. LEASES AND COMMITMENTS
The following is a schedule of future minimum lease payments required under
third party operating leases that have initial or remaining noncancelable lease
terms in excess of one year (dollars in thousands):
<TABLE>
<CAPTION>
YEAR
- -------------------------------------------------------------------------------------
<S> <C>
1999................................................................................. $ 8,498
2000................................................................................. 5,879
2001................................................................................. 3,991
2002................................................................................. 2,990
2003................................................................................. 1,821
Thereafter........................................................................... 9,085
</TABLE>
Rental expense associated with third party operating leases was
approximately $8.9 million, $11.4 million, and $11.6 million for the fiscal
years ended June 30, 1998, June 30, 1997, and June 30, 1996,
48
<PAGE>
respectively. It is expected that, in the normal course of business, leases that
expire will be renewed or replaced by leases on other property and equipment.
The Company has a contract whereby certain of its data processing operations
are managed by a third party. Monthly charges during the fiscal years ended June
30, 1998, June 30, 1997, and June 30, 1996 averaged approximately $902,000,
$945,800, and $832,000, respectively under this contract. This contract extends
through December 31, 2005.
14. CONTINGENCIES
INDEMNIFICATION AGREEMENT
The purchase agreement between OYL and the former owners of the Company
contained certain indemnifications relating to specified contingencies that
existed as of the acquisition date relating to certain environmental, tax and
litigation matters. On July 8, 1998, the Company and the former owners entered
into a settlement agreement in resolution of certain disputes which were pending
before the American Arbitration Association in Dallas, Texas, concerning the
interpretation of the indemnification obligation. As a result of the settlement
agreement, the Company paid $10.5 million of the $11.5 million promissory note
due to the former shareholders, discussed in Note 7 of the Consolidated
Financial Statements, and the parties agreed to discharge claims and
entitlements under the indemnification provisions in the purchase agreement. The
residual balance of the promissory note will be reclassified to other
liabilities for specified contingencies that existed as of the acquisition date.
In addition, as a result of the indemnification settlement agreement and the
IRS settlement described below, the Company expects to receive payments from
certain former shareholders of approximately $5 million in fiscal year 1999.
Approximately one-half of the payments to be received from the former
shareholders will be utilized to fund obligations relating to the IRS
settlement.
ENVIRONMENTAL MATTERS
The Company is subject to potential liability under CERCLA, and other
federal, state and local statutes and regulations governing the discharge of
pollutants into the environment and the handling and disposal of hazardous
substances and waste. These statutes and regulations, amongst other things,
impose potential liability on the Company for remediating contamination arising
from the Company's past and present operations and from former operations of
other entities at sites later acquired and now owned by the Company. Many of the
Company's facilities have operated for many years, and substances which are or
might be considered hazardous were generated, used, and disposed of at some
locations, both on and off-site. Therefore, it is possible that environmental
liabilities in addition to those described below may arise in the future. The
Company records liabilities if, in management's judgment, environmental
assessments or remedial efforts are probable and the costs can be reasonably
estimated. These accrued liabilities are not discounted. Such estimates are
adjusted if necessary based on the completion of a formal study or the Company's
commitment to a formal plan of action.
In 1988, a lawsuit was filed in federal court against the Company concerning
the alleged release of trichloroethylene at a former Visalia, California
manufacturing facility (Visalia). In November 1990, the Company entered into a
settlement agreement with all known potentially responsible parties at Visalia
whereby the Company agreed to be solely responsible for the costs of the
remaining cleanup. Also, the Company was named as a potentially responsible
party arising from accidental trichloroethane spills at a facility in
Wilmington, North Carolina. In addition, the Company discovered contaminants in
the soil and/ or groundwater at its three manufacturing facilities in Faribault,
Minnesota, Scottsboro, Alabama, Staunton, Virginia and certain other
manufacturing sites. The level of contamination exceeds mandated levels and will
require remediation.
49
<PAGE>
Based upon estimates prepared by environmental consultants, at June 30, 1998
the Company estimates that related probable remediation costs will be
approximately $18.0 million. The Company believes that these costs have been
adequately reserved for on the balance sheet. The Company is currently assessing
its insurance coverage and is pursuing potential recovery of a portion of such
costs from third parties. No amounts have been recorded in the accompanying
Consolidated Balance Sheets relating to these potential recoveries.
INCOME TAX
The Internal Revenue Service ("IRS") has completed its examination of the
Company's tax returns for the years 1987 through 1994. A final executed closing
agreement is expected to be received in late September or early October of 1998.
Settlement with the IRS was essential to the settlement of the indemnification
agreement, which is described above.
LITIGATION
The Company is involved in various lawsuits in the ordinary course of
business. These lawsuits primarily involve claims for damages arising out of the
use of the Company's products. The Company is also involved in litigation and
administrative proceedings involving employment matters and commercial disputes.
Some of these lawsuits include claims for punitive as well as compensatory
damages. The Company is insured for product liability claims for amounts in
excess of established deductibles and accrues for the estimated liability on a
case-by-case basis up to the limits of the deductibles. All other claims and
lawsuits are also handled on a case-by-case basis.
The Company does not believe that the potential liability from the ultimate
outcome of environmental, income tax and litigation matters will have a material
adverse effect on it.
16. EXTRAORDINARY ITEM
During fiscal year June 30, 1996 the Company completed the Refinancing. See
Note 7. As part of the Refinancing the Company used some of the proceeds from
the offering to repay long-term debt. As a result, the Company recorded an
extraordinary item of $1.6 million ($2.7 million net of $1.1 million tax
benefit) relating to an accelerated charge-off of unamortized debt issuance
cost.
50
<PAGE>
17. SEGMENT INFORMATION
The Company serves the air quality control industry with two industry
segments: Commercial Air Conditioning and Refrigeration ("Commercial Air
Conditioning & Refrigeration"), the manufacture, sale and distribution of
heating, ventilating, air conditioning, industrial refrigeration and freezing
equipment products, and Filtration Products ("Filtration Products"), the
manufacture and sale of air filtration products and systems. Information
relating to operations in each industry segment and information by geographic
area is as follows as of and for the fiscal years ended June 30, 1998, June 30,
1997, and June 30, 1996:
CLASSIFIED BY INDUSTRY:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net Sales:
Commercial Air Conditioning & Refrigeration............................ $ 620,248 $ 597,216 $ 566,773
Filtration Products.................................................... 358,843 365,692 356,268
Eliminations........................................................... (13,342) (14,975) (21,646)
----------- ----------- -----------
Total.............................................................. $ 965,749 $ 947,933 $ 901,395
----------- ----------- -----------
----------- ----------- -----------
Operating Income (Loss):
Commercial Air Conditioning & Refrigeration............................ $ 23,722 $ 23,314 $ 37,187
Filtration Products.................................................... 15,369 28,869 34,876
Corporate & Amortization............................................... (11,368) (11,587) (15,367)
----------- ----------- -----------
Total.............................................................. $ 27,723 $ 40,596 $ 56,696
----------- ----------- -----------
----------- ----------- -----------
Total Assets:
Commercial Air Conditioning & Refrigeration............................ $ 350,585 $ 331,540 $ 331,798
Filtration Products.................................................... 187,561 202,579 185,656
Corporate, Goodwill & Intangibles...................................... 258,732 276,249 289,500
----------- ----------- -----------
Total.............................................................. $ 796,878 $ 810,368 $ 806,954
----------- ----------- -----------
----------- ----------- -----------
Depreciation/Amortization:
Commercial Air Conditioning & Refrigeration............................ $ 8,876 $ 8,363 $ 7,114
Filtration Products.................................................... 6,300 5,526 5,144
Corporate, Goodwill & Intangible Amortization.......................... 11,770 11,678 13,551
----------- ----------- -----------
Total.............................................................. $ 26,946 $ 25,567 $ 25,809
----------- ----------- -----------
----------- ----------- -----------
Capital Expenditures:
Commercial Air Conditioning & Refrigeration............................ $ 19,233 $ 9,006 $ 8,983
Filtration Products.................................................... 4,594 6,871 5,782
Corporate.............................................................. 95 64 --
----------- ----------- -----------
Total.............................................................. $ 23,922 $ 15,941 $ 14,765
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
51
<PAGE>
17. SEGMENT INFORMATION (CONTINUED)
CLASSIFIED GEOGRAPHICALLY:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net Sales:
U.S.................................................................... $ 573,389 $ 575,708 $ 559,505
Europe................................................................. 329,488 314,483 297,976
Other.................................................................. 62,872 57,742 43,914
----------- ----------- -----------
Total.............................................................. $ 965,749 $ 947,933 $ 901,395
----------- ----------- -----------
----------- ----------- -----------
Operating Income (loss):
U.S.................................................................... $ 21,107 $ 33,335 $ 46,880
Europe................................................................. 13,101 13,225 20,339
Other.................................................................. 4,883 5,623 4,844
Corporate & Amortization............................................... (11,368) (11,587) (15,367)
----------- ----------- -----------
Total.............................................................. $ 27,723 $ 40,596 $ 56,696
----------- ----------- -----------
----------- ----------- -----------
Total Assets:
U.S.................................................................... $ 278,591 $ 295,295 $ 294,002
Europe................................................................. 224,521 202,538 194,311
Other.................................................................. 35,034 36,286 29,141
Corporate, Goodwill & Intangibles...................................... 258,732 276,249 289,500
----------- ----------- -----------
Total.............................................................. $ 796,878 $ 810,368 $ 806,954
----------- ----------- -----------
----------- ----------- -----------
Depreciation/Amortization:
U.S.................................................................... $ 11,112 $ 10,335 $ 8,769
Europe................................................................. 3,571 3,170 3,107
Other.................................................................. 493 384 382
Corporate, Goodwill & Intangible Amortization.......................... 11,770 11,678 13,551
----------- ----------- -----------
Total.............................................................. $ 26,946 $ 25,567 $ 25,809
----------- ----------- -----------
----------- ----------- -----------
Capital Expenditures:
U.S.................................................................... $ 18,183 $ 9,484 $ 11,109
Europe................................................................. 5,052 5,712 2,912
Other.................................................................. 592 681 744
Corporate-U.S.......................................................... 95 64 --
----------- ----------- -----------
Total.............................................................. $ 23,922 $ 15,941 $ 14,765
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Transfers between geographic areas are not significant. Identifiable assets
are those assets identified with the operation of each business segment or
geographic area. Prior year amounts have been restated to reflect intercompany
sales transactions between the segments.
18. ACQUISITION OF J&E HALL LTD.
On December 4, 1995 the Company, through one of its wholly-owned
subsidiaries, acquired the UK and Ireland refrigeration and freezing operations
of APV plc for consideration of approximately $35 million. The acquired business
operates as J&E Hall Ltd. and is an integrated supplier of industrial
refrigeration and freezing products, systems and services.
52
<PAGE>
19. RELATED PARTY TRANSACTIONS
Hong Leong and its subsidiary companies, including OYL and the Company, have
a policy of buying from related companies whenever feasible. During fiscal years
ended June 30, 1998, June 30, 1997, and June 30, 1996 pursuant to this policy,
the Company and various of its subsidiaries sold an aggregate of approximately
$13.0, $16.3, and $14.4 million, respectively of the Company's products to
various OYL entities in the ordinary course of business. Additionally during
fiscal years 1998 and 1997, the Company purchased approximately $2.3 million and
$3.3 million, respectively, of product from OYL and its subsidiary companies in
the ordinary course of business. The Company does not expect a change in this
policy and plans to continue to buy from and sell to OYL and Hong Leong related
entities in the future.
The Company has entered into a number of partnerships with local companies
throughout the world to maximize its brand name exposure, increase its market
penetration and enhance its manufacturing and distribution capabilities. The
Company currently has thirteen joint ventures to which the Company sold $35.6
million and $12.6 million in sales for fiscal years 1998 and 1997, respectively,
with fiscal year 1996 having immaterial sales due to the startups of the
majority of the joint ventures. The Company currently has loaned two of the
joint ventures approximately $1.0 million and has commitments outstanding to
provide an additional $1.0 million to the partnerships.
The Company has entered into trademark license and royalty agreements with
O.Y.L. Manufacturing Company SDN BHD ("OMC") (the "OMC Agreement"), Shenzhen
O.Y.L. Electrical Co. Ltd. ("Shenzhen") (the "Shenzhen Agreement") and P.T.
O.Y.L. Sentra Manufacturing ("PT OYL") (the "PT OYL Agreement"). Pursuant to
such Agreements, the Company has granted OMC, Shenzhen and PT OYL, respectively,
nonexclusive, nontransferable rights and licenses to use the trademark "McQuay"
in connection with the sale and marketing of certain products exclusively
through Shenzhen's, OMC's and PT OYL's respective international distribution
networks. In exchange for such grants, OMC, Shenzhen and PT OYL have each agreed
to pay the Company earned royalty payments ranging from 2% to 5% of the
accumulated net sales of such products. The Company has been paid or was owed
$227,000, $207,000, and $228,000 pursuant to the OMC Agreement, $124,000,
$81,000, and $39,000 pursuant to the Shenzhen Agreement, and $18,000, $27,000,
and $3,000 pursuant to the PT OYL Agreement for the years ended June 30, 1998,
June 30, 1997, and June 30, 1996 respectively. Each of OMC, Shenzhen, and PT OYL
are subsidiaries of OYL.
In August 1995, the Company entered into an agreement with Wuhan-McQuay Air
Conditioning & Refrigeration Company Ltd. ("Wuhan-McQuay"), a joint venture of
Wuhan-New World Refrigeration Industrial Company Limited and McQuay Asia (Hong
Kong) Ltd., an OYL subsidiary, to license certain technology and trademarks for
use in the Peoples Republic of China in exchange for a royalty of 2%-3% of net
sales. Pursuant to such agreement, royalties from the first two years of the
contract have been accumulated and are due in January 1999. To date,
Wuhan-McQuay has accrued royalties of $138,000. The payment of the royalty
payments will be made quarterly and the amount of such payments will be
dependent upon Wuhan-McQuay's financial condition.
OYL has issued a standby letter of credit in the amount of L17.0 million
which supports a wholly-owned subsidiary. OYL has also issued a $6.0 million
letter of credit which supports a revolving line of credit facility for the
Company's subsidiary in Canada. No fees were paid to OYL in connection with
either letter of credit.
The Company also has available letter of credit facilities totaling $25
million that are supported by letters of credit from OYL which were fully
utilized at June 30, 1998 and June 30, 1997. The commitments made under these
new facilities expire in March 1999, but may be extended annually for successive
one year periods with the consent of OYL and the banks providing the facilities.
No fees were paid to OYL in connection with the letter of credit facilities.
53
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Boards of Directors and Stockholder
AAF-McQuay Inc.
We have audited the consolidated financial statements of AAF-McQuay Inc. and
subsidiaries as of June 30, 1998 and June 30, 1997, and for each of the three
years in the period ended June 30, 1998 and have issued our report thereon dated
September 15, 1998 included elsewhere in this Annual Report on Form 10-K. Our
audits also included the financial statement schedule listed in Item 14(a) of
this Annual Report on Form 10-K. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
[SIGNATURE]
Baltimore, Maryland
September 15, 1998
54
<PAGE>
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
AAF-MCQUAY INC.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
------------------------
BALANCE AT
BEGINNING CHARGED TO CHARGED TO BALANCE AT
OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1998
Allowance for doubtful receivables...... $ 7,629 $ 1,702 $ 1,970(a) $ 7,361
Accrued warranty expense................ 22,212 16,326 (12) 12,713(b) 25,813
YEAR ENDED JUNE 30, 1997
Allowance for doubtful receivables...... $ 6,313 $ 2,985 $ 18 $ 1,687(a) $ 7,629
Accrued warranty expense................ 22,312 17,065 (12) 17,153(b) 22,212
YEAR ENDED JUNE 30, 1996
Allowance for doubtful receivables...... $ 4,595 $ 1,285 $ 733(c) $ 301(a) $ 6,312
Accrued warranty expense................ 19,739 11,339 1,072(c) 9,838(b) 22,312
</TABLE>
- ------------------------
(a) Uncollectible accounts written off net of recoveries.
(b) Warranty claims honored during the year.
(c) Amounts added during the year due to acquisition of J&E Hall.
55
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
INTRODUCTION
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- ---------------------------------------------------------------------
<S> <C> <C>
Joseph B. Hunter...................... 61 President and Chief Executive Officer and Director
Gerald L. Boehrs...................... 57 Executive Vice President and Chief Operating Officer of Filtration
Products Group and Director
Michael J. Christopher................ 54 Executive Vice President and Director
Andrew R. Morrison.................... 47 Chief Financial Officer and Secretary
Bruce D. Krueger...................... 36 Controller and Assistant Secretary
Harry E. Carmitchel................... 47 Vice President and General Manager of Applied Products
Donald L. Rittgers.................... 51 Vice President and General Manager of Terminal Air Conditioning
Gary R. Boyd.......................... 46 Vice President of Human Resources
Dixie L. Randle....................... 45 General Counsel and Assistant Secretary
Ronald J. Pederson.................... 40 Treasurer
Ho Nyuk Choy.......................... 44 Director
Tan Sri Quek Leng Chan................ 55 Director
Liu Wan Min........................... 54 Director
Roger Tan Kim Hock.................... 51 Director
</TABLE>
56
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT (CONTINUED)
JOSEPH B. HUNTER has served as Chief Executive Officer of the Company since
May 1994. Prior to joining the Company, Mr. Hunter served for 21 years in
various executive capacities for York International Corporation and for his last
13 years with York as President of its International Business Group until March
1994.
GERALD L. BOEHRS has served as Executive Vice President of the Company since
May 1994 and currently is the Chief Operating Officer of the Filtration Products
Group. He served as the Chief Operating Officer of the Commercial Air
Conditioning Group from May 1996 through April 1998 and Chief Operating Officer
of the Filtration Products Group from May 1994 to May 1996. From 1992 to 1994,
Mr. Boehrs served as Executive Vice President and General Manager of the
Filtration Products Group. From 1989 to 1992, he served as Vice President,
Technical Support. From 1987 until 1989, Mr. Boehrs headed the Company's
residential HVAC business.
MICHAEL J. CHRISTOPHER has served as the Executive Vice President of the
Company since June 1996 and is currently the head of new distribution and joint
ventures. Mr. Christopher has served as Chief Operations Officer of the
Filtration Products Group from June 1996 through mid 1998, Vice President,
Planning of the Company from June 1994 to June 1996 and served as the Chief
Financial Officer from March of 1995 though November 1996. From 1984 to 1994,
Mr. Christopher served in various financial and operating positions at York
International Corporation, most recently in the International Group and prior to
that as Vice President, Finance of its Applied Systems Group.
ANDREW R. MORRISON has served as Chief Financial Officer and Secretary of
the Company since July 1997 and served as the Treasurer from December 1995 until
July 1997. From 1992 until 1995, Mr. Morrison served as Assistant Treasurer of
PHH Corporation, a provider of vehicle management, relocation, real estate and
mortgage banking services. From 1989 to 1992, Mr. Morrison served as Director of
Corporate Finance of British Petroleum plc.
BRUCE D. KRUEGER has served as Vice President and Corporate Controller of
the Company since October of 1997. He joined the Company as Vice President and
Global Controller of AAF in January of 1996 and has worked in the air filtration
industry since 1992. Prior to 1992, Mr. Krueger served as Director of Internal
Audit at Clarcor and was with Coopers & Lybrand from 1984 to 1990.
HARRY E. CARMITCHEL has served as Vice President and General Manager of
Applied Products since January 1998. Prior to joining the Company, he served as
their consultant for one and a half years as a Principal at The Pacific Group.
Mr. Carmitchel has 20 years of consulting and managerial experience.
DONALD L. RITTGERS has served as Vice President and General Manager of
Terminal Air Conditioning since 1996. He has 25 years of progressive management
experience in sales, marketing, manufacturing and general management in the HVAC
industry.
GARY R. BOYD has served as Vice President of Human Resources for the Company
since July 1997 and as Vice President of Human Resources for McQuay
International from February 1996 until July 1997. From 1984 to 1996, Mr. Boyd
served in various Human Resources positions at Cummins Engine Company, most
recently as Director of Human Resources for Worldwide operations for Onan
Corporation, a division of Cummins.
DIXIE L. RANDLE has served as the General Counsel and Assistant Secretary of
the Company since July 1997. From July 1994 until June 1997, Ms. Randle served
as Division General Counsel of the Commercial Air Conditioning Group, and from
May 1993 to July 1994, as Senior Attorney for the Group. Prior to 1993, she
served on the in-house counsel staff of the Lehndorff Group of Companies, a
commercial real estate investment and property management group.
57
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT (CONTINUED)
RONALD J. PEDERSON has served as the Treasurer since July 1997. From March
1995 until July 1997, Mr. Pederson served as the Assistant Treasurer of the
Company. He served as Manager of Treasury Operations from February of 1988
forward.
HO NYUK CHOY has served as Group Managing Director of OYL since 1993. From
1989 to 1993, Mr. Ho served in various management positions with OYL. Mr. Ho is
a director of McQuay Asia (Hong Kong) Limited and Hume.
TAN SRI QUEK LENG CHAN has served as Executive Chairman of Hume since 1990.
He has served as Group Chief Executive Officer of Hong Leong since 1968. Mr.
Quek currently serves as Executive Chairman of Hong Leong Credit Berhad, Hong
Leong Bank Berhad, Hong Leong Industries Berhad, Malaysian Pacific Industries
Bhd, Hong Leong Properties Berhad, Tasek Cement BHD, C.I. Holdings Berhad and
Camerlin Group Berhad and as Chairman of Nanyang Press (Malaya) Berhad and HLG
Capital Berhad. Mr. Quek is a Director of OYL and Southern Steel Berhad.
LIU WAN MIN has served as Deputy Chairman of OYL since 1993. From 1974 to
1993, Mr. Liu served as Group Managing Director of OYL. From 1996 through 1997,
Mr. Liu has served as the Group Managing Director of Nanyang Press Bhd, a Hong
Leong Group Company.
ROGER TAN KIM HOCK has served as President and Chief Executive Officer of
Hume since 1993. From 1988 to 1993, he served as Chief Executive Officer of HLG
Securities Sdn Bhd. From 1985 through 1988 he served as the Managing Director of
Hong Leong Industries Berhad and from 1976 through 1985, he served as the
General Manager of Hong Leong Property Sdn Bhd. Mr. Tan serves as a Director of
Hume.
Each of the Directors of the Company has been a Director since May 2, 1994,
except for Michael J. Christopher who was elected June 20, 1995. All Directors
hold office until the next annual meeting of shareholders of the Company and
until their successors have been elected and qualified. The Company does not
currently pay the Directors any fees for serving on the Board of Directors,
although the Company may consider a change in this policy in the future.
Executive officers of the Company are elected by and serve at the discretion of
the Board of Directors. There are no family relationships among the Directors or
executive officers of the Company.
58
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation paid or
accrued by the Company to the Chief Executive Officer and each of the next four
most highly compensated executive officers of the Company, for services rendered
in all capacities to the Company and its subsidiaries during the years ended
June 30, 1998, June 30, 1997, and June 30, 1996 .
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
<S> <C> <C> <C> <C> <C> <C> <C>
LONG TERM
INCENTIVE
OTHER ANNUAL SECURITIES PLAN
COMPENSATION UNDERLYING PAYOUTS $ ALL OTHER
NAME YEAR SALARY $ BONUS $ $(A) OPTIONS/SARS # (I) COMPENSATION $
- --------------------------------- --------- --------- --------- ------------- --------------- ----------- ---------------
Joseph B. Hunter................. 1998 413,243 225,500 -- 22.70 -- 14,988(b)
President and Chief Executive 1997 402,120 140,000 -- -- -- 6,763(b)
Officer 1996 365,095 400,625 -- -- -- 12,219(b)
Gerald L. Boehrs................. 1998 212,521 110,765(d) 35,612(e) 2.12 -- 7,977(b)
Executive Vice President 1997 207,022 -- -- -- 136,557(c) 6,889(b)
1996 177,323 87,975 -- -- 7,026(b)
Michael J. Christopher........... 1998 205,286 78,409 -- 1.92 -- 8,266(b)
Executive Vice President 1997 198,638 -- -- -- -- 6,537(b)
1996 175,077 102,272 -- -- -- 10,267(b)
Andrew R. Morrison............... 1998 179,124 61,069 -- 1.34 -- 6,889(b)
Chief Financial Officer and 1997 141,516 -- -- -- -- --(b)
Secretary 1996 74,039(f) 25,000 -- -- -- --(b)
Harry E. Carmitchel.............. 1998 249,165(f) 120,563(g) 46,227(h) -- -- --
Vice President 1997 -- -- -- -- -- --
1996 -- -- -- -- -- --
</TABLE>
- ------------------------
(a) Unless otherwise indicated, the aggregate dollar cost to the Company of
perquisites and other personal benefits received by the executives did not
exceed the lesser of $50,000 or 10% of the total amounts reported in the
Salary and Bonus columns.
(b) Represents contributions by the Company to the Company's 401(k) plan.
(c) Represents payouts from the Predecessor Company's Equity Participation Plan.
(d) Included in this bonus is a relocation bonus of $50,000 given to Mr. Boehrs
for his relocation from Minneapolis to Louisville as he assumed the Chief
Operating Officer of Filtration Products Group position.
(e) Represents reimbursement for relocation and moving expense and includes
repayment on a promissory note. Mr. Boehrs was reimbursed $25,527 for
relocation expenses including temporary living expenses and closing cost.
The reimbursement for moving expenses totaled $10,085.
(f) Represents approximately six months of salary as Mr. Morrison joined the
Company in December of 1995 and Mr. Carmitchel began his employment with the
Company in January of 1998. Additionally, Mr. Carmitchel was paid $164,550
for consulting services performed from July of 1997 through December of 1997
prior to his employment with the Company.
59
<PAGE>
(g) Included in this bonus is a $100,000 guaranteed bonus provided to Mr.
Carmitchel to fulfill the Company's contractual obligation from the original
consulting agreement in order that Mr. Carmitchel would become an employee
of the Company.
(h) Represents reimbursement for relocation and moving expenses amounting to
$46,227. Mr. Carmitchel was reimbursed $30,797 for relocation expenses
including temporary living expenses and closing costs. The reimbursement for
moving expenses totaled $15,430.
(i) Represents granted stock options for shares of AAF-McQuay Group, Inc. shares
STOCK OPTION PLAN
In 1997, the Company adopted a Stock Option Plan which provides for the
grant of non-qualified stock options to certain members of management and key
employees to purchase the common stock of the Company's parent AAF-McQuay Group
Inc. The Company granted options under the stock option plan during fiscal year
1998. The related impact to the Statement of Operations was based on an
independent valuation of the Company at or near the grant date.
The following table sets forth certain information concerning options
granted during fiscal year 1998 to the Chief Executive Officer and to each of
the next four most highly compensated executive officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
ANNUAL
RATES OF
STOCK
INDIVIDUAL GRANTS PRICE
------------------------------------ APPRECIATION
NUMBER OF FOR
SECURITIES PERCENT OF TOTAL OPTION
UNDERLYING OPTIONS GRANTED EXERCISE TERM
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ---------
NAME GRANTED (#) FISCAL 1998 ($/SH) DATE 0% ($)
- ------------------------------------------------ ----------------- ----------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Joseph B. Hunter................................ 7.05 18% 188,889 12/10/07 350,015
President and Chief Executive Officer 15.65 41% 196,890 12/10/07 651,992
Gerald L. Boehrs................................ 2.12 5% 203,214 12/10/07 --
Executive Vice President
Michael J. Christopher.......................... 1.92 5% 203,214 12/10/07 --
Executive Vice President
Andrew R. Morrison.............................. 1.34 3.5% 203,214 12/10/07 --
Chief Financial Officer
Harry E. Carmitchel............................. -- -- --
Vice President
<CAPTION>
NAME 5% ($) 10% ($)
- ------------------------------------------------ ---------- ----------
<S> <C> <C>
Joseph B. Hunter................................ 1,401,632 3,020,805
President and Chief Executive Officer 2,986,208 6,580,543
Gerald L. Boehrs................................ 103,440 419,925
Executive Vice President
Michael J. Christopher.......................... 93,681 380,310
Executive Vice President
Andrew R. Morrison.............................. 65,382 265,424
Chief Financial Officer
Harry E. Carmitchel............................. -- --
Vice President
</TABLE>
60
<PAGE>
A summary of the granted options and their respective fiscal year end values
for the Chief Executive Officer and each of the next four most highly
compensated executive officers is as follows:
<TABLE>
<CAPTION>
SHARES NUMBER OF VALUE OF
ACQUIRED ON UNEXCERCISED EXERCISE "EXERCISABLE"
EXERCISE OPTIONS PRICE OPTIONS
------------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Joseph B. Hunter............................................ 7.05 $ 188,889 $ 350,015
President and Chief Executive Officer none 15.65 196,890 651,992
Gerald L. Boehrs............................................
Executive Vice President none 2.12 203,214 0
Michael J. Christopher......................................
Executive Vice President none 1.92 203,214 0
Andrew R. Morrison..........................................
Chief Financial Officer and Secretary none 1.35 203,214 0
Harry E. Carmitchel.........................................
Vice President none -- -- --
</TABLE>
EMPLOYMENT AGREEMENT
As of the OYL Acquisition date, AAF-McQuay Group Inc., the Company's parent,
entered into an employment agreement with Mr. Hunter. Pursuant to this
agreement, Mr. Hunter serves as President and Chief Executive Officer of the
Company at a current base salary of $413,243 per year and a bonus of not less
than $140,000 per year. Mr. Hunter's employment agreement expires May 2, 1999.
EMPLOYEE BENEFIT PLANS
EQUITY PARTICIPATION PLAN. Effective January 1, 1991 the Company
established an Executive Employment and Compensation Plan (the "Equity
Participation Plan") and entered into Executive Employment and Compensation
Agreements with certain executive officers of the Company including Mr. Boehrs
(referred to herein as a "NEPI Holder"). Under the Equity Participation Plan,
the Company agreed to provide each such officer a contingent net equity
participation interest (a "NEPI Interest") in the Company under certain
circumstances, with Mr. Boehrs at 0.4%.
Pursuant to the Equity Participation Plan, as modified effective May 2, 1994
and in connection with the OYL Acquisition, 10% of each NEPI Holder's NEPI
Interest is designated a Reserve Amount and 90% of each NEPI Holder's NEPI
Interest has been paid or is payable by the Company to the NEPI Holder pursuant
to the following formula: one-third on May 2, 1994; one-third on May 2, 1995;
and one-third on May 2, 1997. On April 29, 1994 the Company established and
funded an irrevocable trust for the purpose of making such NEPI Interest
payments to NEPI Holders in due course. On May 2, 1996, the final distributions
were made from the trust. On July 8, 1998, the reserve was paid out to the NEPI
Holders in conjunction with the settlement of the indemnification agreement.
RETIREMENT PLAN. Effective April 3, 1982, the Company adopted the
Predecessor Company Retirement Plan (the "Retirement Plan"), which was amended
as of January 1, 1991 and further amended as of May 1, 1991 and December 31,
1991. The Retirement Plan has been maintained for the benefit of certain
salaried and hourly employees of the Company. Effective January 1, 1989,
benefits for most salaried participants in the Retirement Plan were frozen as of
December 31, 1988.
Normal retirement age under the Retirement Plan is age 65. A participant's
annual rate of pension commencing after retirement is determined based on a
number of factors, including that participant's earnings, years of service and
contributions.
61
<PAGE>
The annual benefit amount, commencing at normal retirement age and payable
as a single life annuity, under the Retirement Plan for Mr. Boehrs is
approximately $1,777.
SENIOR EXECUTIVE SEVERANCE PLAN. Effective April 26, 1994 the Company
established a Senior Executive Severance Plan (the "Severance Plan") and,
pursuant thereto, entered into senior executive severance agreements with
certain executive officers of the Company including Mr. Boehrs. Pursuant to the
Severance Plan and the applicable agreements, upon involuntary termination
without good cause of such executive officer, the executive officer will be
entitled to receive his base salary as then in effect for a maximum period of 12
months and cash in respect of certain retirement benefits. Pursuant to such
agreements, involuntary termination "without good cause" is defined to include
(i) any termination that does not result from material dishonesty, significant
fraud, willful negligence or gross and material malfeasance detrimental to the
Company or (ii) any requirement that the executive be based or perform services
at a new location, a material change in the position, duties, authority or
responsibilities of the executive or any decrease in the executive's
compensation.
SALARY CONTINUATION PLAN. Effective January 1, 1990, the Company
established an Executive Salary Continuation Plan (the "Salary Continuation
Plan") for certain executive officers and key employees of the Company which
provides for compensation in the event of retirement or death.
In the event a participant retires after he attains the age of 65 the
Company is required to pay to the participant a specified amount ($50,000 per
year in the case of Mr. Boehrs) until the earlier of (i) the date of death of
the participant or (ii) the first day of the month following the ninth
anniversary of the date of retirement of the participant. The Salary
Continuation Plan further provides for adjustments in the event of early
retirement. In the event the participant becomes totally disabled or is
terminated involuntarily without good cause, the participant will remain
eligible for the benefits. In the event of the death of a participant while
actively employed by the Company, the Company will make such payments to the
designated beneficiary of the participant. Effective May 22, 1997, Mr. Boehrs is
fully vested in all rights upon his termination of employment with the Company,
whether voluntary or involuntary, with or without good cause, or due to
disability or death, as if Mr. Boehrs had attained the age of 65 at the time of
termination, whether or not he has in fact reached that age.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Hunter is the only officer or employee of the Company who participated
in deliberations of the Company's Board of Directors concerning executive
officer compensation during the last fiscal year.
62
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of June 30, 1998 with respect
to the beneficial ownership of shares of the Company's Common Stock by each
person known to the Company to own 5% or more of its Common Stock (determined in
accordance with the applicable rules of the Commission), and by the Company's
directors and current executive officers and such directors and executive
officers as a group.
COMMON STOCK, PAR VALUE $100.00 PER SHARE
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PERCENT OUTSTANDING
- -------------------------------------------------------------------------- ------------------- -----------------------
<S> <C> <C>
AAF-McQuay Group Inc.(a).................................................. 2,947 100
Legg Mason Tower, Suite 2800
111 South Calvert Street
Baltimore, Maryland 21202
All current directors and executive officers as a group (13 persons)(a) 0 0
</TABLE>
- ------------------------
(a) AAF-McQuay Group Inc. is a wholly-owned subsidiary of AMG Holdings N.V., a
Netherlands corporation (Hoekenrode 6-8, 1102BR Amsterdam Zuidoost, The
Netherlands). AMG Holdings N.V. is a wholly-owned subsidiary of AMG Holdings
B.V., a Netherlands corporation (Hoekenrode 6-8, 1102BR Amsterdam Zuidoost,
The Netherlands). AMG Holdings B.V. is a wholly-owned subsidiary of OYL
(Jalan Pengapit 15/19, 40000 Shah Alam, Selangor Darul Ehsan, Malaysia). OYL
is publicly traded on the Kuala Lumpur Stock Exchange. Approximately 62.5%
of the outstanding stock of OYL is owned by Hume, a company also publicly
traded on the Kuala Lumpur Stock Exchange. Approximately 45.2% of the
outstanding stock of Hume is owned by Hong Leong (Hong Leong Group, Level
10, Wisma Hong Leong, 18 Janlan Perak, 50450 Kuala Lumpur, Malaysia). Tan
Sri Quek Leng Chan is a director of the Company, a director and the Chairman
of AAF-McQuay Group Inc., the Executive Chairman of Hume and a controlling
shareholder of Hong Leong.
SECURITY OWNERSHIP OF MANAGEMENT IN PARENTS OF THE COMPANY
The following tables set forth information as of June 30, 1998 for OYL and
Hume pertaining to the beneficial ownership of shares of the respective
company's equity securities by the Company's directors and current executive
officers and such directors and executive officers as a group.
OYL ORDINARY SHARES, PAR VALUE RM 1.00 PER SHARE
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PERCENT OUTSTANDING
- -------------------------------------------------------------------------- ----------------- ---------------------
<S> <C> <C>
Tan Sri Quek Leng Chan.................................................... 84,868,828(a) 62.7
Liu Wan Min............................................................... 6,352,200 4.7
Ho Nyuk Choy.............................................................. 44,000 *
Joseph B. Hunter.......................................................... 27,500 *
Michael J. Christopher.................................................... 5,000 *
All current directors and executive officers as a group (13 persons)...... 91,297,528 67.4
</TABLE>
63
<PAGE>
HUME ORDINARY STOCK UNITS, PAR VALUE RM 1.00 PER UNIT
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PERCENT OUTSTANDING
- -------------------------------------------------------------------------- ----------------- ---------------------
<S> <C> <C>
Tan Sri Quek Leng Chan.................................................... 123,531,455(b) 49.9
All current directors and executive officers as a group (13 persons)...... 123,531,455 49.9
</TABLE>
- ------------------------
* Less than one percent (1%).
(a) Includes 84,868,828 shares held by Hume, a company publicly traded on the
Kuala Lumpur Stock Exchange. Approximately 49.9% of the outstanding stock of
Hume is owned by Hong Leong (Hong Leong Group, Level 8, Wisma Hong Leong, 18
Janlan Perak, 50450 Kuala Lumpur, Malaysia). Tan Sri Quek Leng Chan is the
Executive Chairman of Hume and a controlling shareholder of Hong Leong.
(b) Includes 123,531,455 shares held by Hong Leong.
64
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the acquisition of J&E Hall, which is now a wholly-owned
subsidiary of the Company, OYL issued a standby letter of credit in the amount
of L17.0 million which supports the J&E Hall L17.0 million revolving credit
facility. OYL has also issued a $6.0 million letter of credit which supports a
revolving line of credit facility for Company subsidiaries in Canada. No fees
were paid to OYL in connection with either letter of credit.
The Company also has available letter of credit facilities totaling $25
million that are supported by letters of credit from OYL which were fully
utilized at June 30, 1998 and June 30, 1997. The commitments made under these
new facilities expire in March 1999, but may be extended annually for successive
one year periods with the consent of OYL and the banks providing the facilities.
No fees were paid to OYL in connection with the letter of credit facilities.
The Company has entered into trademark license and royalty agreements with
O.Y.L. Manufacturing Company SDN BHD ("OMC") (the "OMC Agreement"), Shenzhen
O.Y.L. Electrical Co. Ltd. ("Shenzhen") (the "Shenzhen Agreement") and P.T.
O.Y.L. Sentra Manufacturing ("PT OYL") (the "PT OYL Agreement"). Pursuant to
such Agreements, the Company has granted OMC, Shenzhen and PT OYL, respectively,
nonexclusive, nontransferable rights and licenses to use the trademark "McQuay"
in connection with the sale and marketing of certain products exclusively
through Shenzhen's, OMC's and PT OYL's respective international distribution
networks. In exchange for such grants, OMC, Shenzhen and PT OYL have each agreed
to pay the Company earned royalty payments ranging from 2% to 5% of the
accumulated net sales of such products. The Company has been paid or was owed
$227,000 pursuant to the OMC Agreement, $124,000 pursuant to the Shenzhen
Agreement, and $18,000 pursuant to the PT OYL Agreement for the year ended June
30, 1998. Each of OMC, Shenzhen, and PT OYL are subsidiaries of OYL.
In August 1995, the Company entered into an agreement with Wuhan-McQuay Air
Conditioning & Refrigeration Company Ltd. ("Wuhan-McQuay"), a joint venture of
Wuhan-New World Refrigeration Industrial Company Limited and McQuay Asia (Hong
Kong) Ltd., an OYL subsidiary, to license certain technology and trademarks for
use in the Peoples Republic of China in exchange for a royalty of 2%-3% of net
sales. Pursuant to such agreement, royalties from the first two years of the
contract have been accumulated and are due in January 1999. To date,
Wuhan-McQuay has accrued royalties of $138,000. The payment of the royalty
payments will be made quarterly and the amount of such payments will be
dependent upon Wuhan-McQuay's financial condition.
Hong Leong and its subsidiary companies, including OYL and the Company, have
a policy of buying from related companies whenever feasible. During fiscal year
ended June 30, 1998 pursuant to this policy, the Company and various of its
subsidiaries sold an aggregate of approximately $13.0 million of the Company's
products to various OYL entities in the ordinary course of business. Sales to
the various OYL entities were as follows for fiscal year 1998: , McQuay Air
Conditioning Pte Limited, $6.2 million, McQuay Asia Limited, $4.8 million,
American Air Filter Sdn Bhd, $1.5 million, McQuay Philippines, $267,000, and
Other $200,000. Additionally, the Company purchased approximately $2.3 of
product from OYL and its subsidiary companies in the ordinary course of
business. Purchases from OYL entities were as follows for 1998: OYL
Manufacturing Sdn Bhd, $1.9 million, McQuay Asia Limited, $182,000, and American
Air Filter Sdn Bhd, $172,000. The Company does not expect a change in this
policy and plans to continue to buy from and sell to OYL and Hong Leong related
entities in the future.
65
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. Financial Statements
Report of the Independent Auditors
Consolidated Balance Sheets--
at June 30, 1998 and June 30, 1997
Consolidated Statements of Operations--
Years ended June 30, 1998, June 30, 1997, and June 30, 1996
Consolidated Statements of Cash Flows--
Years ended June 30, 1998, June 30, 1997, and June 30, 1996
Consolidated Statements of Stockholder's Equity--
Years ended June 30, 1998, June 30, 1997, and June 30, 1996
2. Financial Statement Schedules
II. Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
(b) Exhibits
<TABLE>
<C> <S>
3.1 Articles of Incorporation(1)
3.2 By-Laws(1)
4.1 Indenture dated as of February 14, 1997 with IBJ Schroder Bank and Trust Company(2)
4.2 Form of Note (included in Exhibit 4.1)
10.1 Employment Agreement dated May 2, 1994 with Joseph B. Hunter(1)
10.2 Executive Employment and Compensation Agreement dated January 1, 1991 with Gerald L.
Boehrs(1)
10.3 NEPI Modification Agreement dated May 2,1994 with Gerald I. Boehrs(1)
10.4 NEPI Relinquishment and Release Agreement dated May 2, 1994 with Gerald L. Boehrs(1)
10.5 NEPI Indemnification Modification Agreement dated May 2, 1994 with Gerald L.
Boehrs(1)
10.6 Senior Executive Severance Agreement dated April 26, 1994 with Gerald L. Boehrs(1)
10.7 Executive Salary Continuation Agreement dated July 25, 1990 with Gerald L. Boehrs(1)
10.8 $11,500,000 Note dated May 2, 1994 to Bank One, Texas, N.A.(1)
10.9 $13,500,000 Reimbursement Agreement dated March 22, 1995 with the Bank of Nova
Scotia(1)
10.10 L22,000,000 Line of Credit Agreement dated November 30, 1995 with Bank of America(1)
10.11 $11,500,000 Amended Line of Credit Agreement dated April 5, 1995 with Citibank
N.A.(1)
10.12 SnyderGeneral Stock Purchase Agreement dated March 31, 1994 with OYL, Richard W.
Snyder and certain other parties listed therein(1)
10.13 SnyderGeneral Tax Indemnification Agreement dated May 2,1994 with Richard W. Snyder
and certain other parties listed therein(1)
10.14 Final Form of J&E Hall Stock Purchase Agreement dated , 1995 with APV plc(1)
</TABLE>
66
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<C> <S>
10.15 Trademark License and Royalty Agreement dated December 27, 1995 with P.T. O.Y.L.
Sentra Manufacturing(1)
10.16 Trademark License and Royalty Agreement dated December 27, 1995 with Shenzhan O.Y.L.
Electrical Company Ltd.(1)
10.17 Trademark License and Royalty Agreement dated December 27, 1995 with O.Y.L.
Manufacturing Company SDN BHD(1)
10.18 Technology Licensing Agreement dated August 8, 1995 with McQuay-Wuhan Air
Conditioning & Refrigeration Company Ltd.(1)
10.19 Asset Transfer Agreement dated May 29, 1995 by and among AAF Asia Pte., Ltd. and
McQuay Air Conditioning (Singapore) Pte. Ltd.(1)
10.20 Supply and Procurement Agreement dated May 2, 1994 with EnergyLine Systems, Inc.(1)
10.21 Credit Agreement dated July 21, 1994 with the Bank of Nova Scotia, Bank Bumiputra
Malaysia Berhad, New York Branch and certain financial institutions listed therein(1)
10.22 First Amendment to Credit Agreement dated April 14, 1995 with the Bank of Nova
Scotia, Bank Bumiputra Malaysia Berhad, New York Branch and certain financial
institutions listed therein(1)
10.23 Second Amendment to Credit Agreement dated November 28, 1995 with the Bank of Nova
Scotia, Bank Bumiputra Malaysia Berhad, New York Branch and certain financial
institutions listed therein(1)
10.24 Third Amendment to Credit Agreement dated February 7, 1996 with The Bank of Nova
Scotia, Bank Bumiputra Malaysia Berhad, New York Branch and certain financial
institutions listed therein(1)
10.25 Fourth Amendment to Credit Agreement dated August 1996 with The Bank of Nova Scotia,
Bank Bumiputra Malaysia Berhad, New York Branch and certain financial institutions
listed therein(5)
10.26 Fifth Amendment to Credit Agreement dated August 1997 with The Bank of Nova Scotia,
Bank Bumiputra Malaysia Berhad, New York Branch and certain financial institutions
listed therein(5)
10.27 Stock Option Plan effective January 1, 1996(4)
10.28 Employment Agreement dated December 23, 1997, with Harry E. Carmitchel(5)
10.29 Agreement to Fully Vest Rights under the Executive Salary Continuation Agreement
dated May 22, 1998 with Gerald L. Boehrs(5)
10.30 Amended and Restated Tax Indemnification Agreement with Richard W. Snyder and certain
other parties mentioned therein(5)
10.31 Indemnification Settlement Agreement and Complete and Permanent Release with OYL,
Richard W. Snyder and certain other parties mentioned therein(5)
10.32 Sixth Amendment to Credit Agreement dated June 26, 1998 with The Bank of Nova Scotia,
Bank Bumiputra Malaysia Berhad, New York Branch and certain financial institutions
listed therein(5)
21 Subsidiaries(5)
24 Power of Attorney(5)
27 Financial Data Schedule(5)
</TABLE>
67
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
- ------------------------
(1) Incorporated by reference to Pre-Effective Amendment Number 1 to the
Company's Registration Statement (File No. 33-80701) on Form S-1 as filed
with the Securities and Exchange Commission (the "Commission") on January
26, 1996.
(2) Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the Commission on April 26, 1996.
(3) Incorporated by reference to the Company's Form 10-K as filed with the
Commission on September 17, 1996.
(4) Incorporated by reference to the Company's Form 10-Q as filed with the
Commission on May 9, 1997.
(5) Filed herewith.
(c) Reports on Form 8-K.
The Company did not file any reports on Form 8-K for the three month
period ended June 30, 1998.
68
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Baltimore, State of
Maryland, on September 18, 1998.
AAF-MCQUAY INC.
BY: /S/ JOSEPH B. HUNTER
-----------------------------------------
Joseph B. Hunter
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ JOSEPH B. HUNTER Principal Executive Officer
- ------------------------------ September 18, 1998
Joseph B. Hunter
/s/ ANDREW R. MORRISON Chief Financial Officer
- ------------------------------ (Principal Financial September 18, 1998
Andrew R. Morrison Officer)
/s/ BRUCE D. KRUEGER Controller (Principal
- ------------------------------ Accounting Officer) September 18, 1998
Bruce D. Krueger
The Board of Directors:
<TABLE>
<S> <C>
Joseph B. Hunter Michael J. Christopher
Liu Wan Min Quek Leng Chan
Ho Nyuk Choy Roger Tan Kim Hock
Gerald L. Boehrs
By: /s/JOSEPH B. HUNTER September 18, 1998
Joseph B. Hunter
Attorney-in-Fact
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE SECURITIES EXCHANGE ACT 0F 1934 BY REGISTRANTS WHICH HAVE
NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy materials have been sent to security-holders
during the period covered by this report.
69
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.28 Employment Agreement dated December 23, 1998 with Harry E. Carmitchel
10.29 Agreement to Fully Vest Rights under the Executive Salary Continuation Agreement dated May 22, 1998 with
Gerald L. Boehrs
10.30 Amended and Restated Tax Indemnification Agreement with Richard W. Snyder and certain other parties
mentioned therein
10.31 Indemnification Settlement Agreement and Complete and Permanent Release with OYL, Richard W. Snyder and
certain other parties mentioned therein
10.32 Sixth Amendment to Credit Agreement dated September 1998 with The Bank of Nova Scotia, Bank Bumiputra
Malaysia Berhad, New York Branch and certain financial institutions listed therein
21 Subsidiaries
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
70
<PAGE>
Exhibit 10.28
December 23, 1997
Mr. Harry Carmitchel
7437 Oak Shore Drive
Portage, MI 49024
Dear Harry:
We are pleased to confirm our offer of employment as Vice President - Applied
Products for AAF-McQuay Inc. Your starting salary will be $16,667 per month, an
annual equivalent of $200,000, paid bi-weekly. You will be eligible to
participate in our Management Incentive Program at a 50% EV level. We will
guarantee the EV value of this bonus opportunity for FY 98 and FY 99. This
guarantee will be included in your base salary. For the balance of this Fiscal
Year, your monthly earnings will be a base of $16,667, plus an additional
$16,667 for the guaranteed portion of the bonus opportunity. Beginning July 1,
1998, your salary will reflect the $16,667 per month but the guaranteed portion
of the bonus will be changed to $8,333 per month. Of course, any adjustment to
your base during the next 18 months will cause a recalculation of the bonus
guarantee since this is a reflection of a per cent of base salary.
In addition, within the Management Incentive Plan there is an Over Achievement
(OA) opportunity which will reflect a blend of the Chiller Business Unit July
STP with the Air Handling Business Unit January STP for Net Capital Employed
(NCE),and EBITDA, weighted 30% and 70% respectively. This OA amount will be for
the second half of FY 98 and thus will have a maximum payout of $50,000.
We also agree to provide you with relocation assistance per policy (forwarded
earlier) except that the provision for miscellaneous expenses, currently capped
at $5000, will be raised to $10,000. Also, we appreciate the uncertain home
market conditions currently going on in Kalamazoo and the negative impact this
could have on your equity position when selling your home. Recognizing that
equity is a combination of original purchase price, current appraised value, and
final sale price, we are interested in helping you protect your investment. Not
knowing what that might mean, I'd like to suggest that we have Corporate
Transfer Service get involved in your selling strategy and look to them to
assist us in recommending a plan which serves both of our interests.
Group life, dental, and health insurance will be available to you on the first
of the month following your employment.. Your life will automatically be insured
in the amount of $50,000 with an optional one or two times your basic annual
salary also available if you should elect this additional coverage. The various
insurance plans for you and your eligible dependents will be described in
greater detail during your benefit orientation session. You are eligible to
<PAGE>
enroll in our 401(k) Savings Plan and Pension plan after one year of service.
You will also accrue vacation at a rate of 3 weeks per year, beginning
immediately, with future accrual changes to be based on the normal vacation
schedule. However, we will credit you with two weeks of vacation immediately.
Mr. Harry Carmitchel
December 23, 1997
Page 2
AAF-McQuay, Inc. believes that a work environment free of drug and alcohol abuse
is healthier, safer, and more productive. AAF-McQuay, Inc. and its employees
have a responsibility to maintain such a workforce under the Drug Free Workplace
Act of 1988. Each candidate offered a position at AAF-McQuay, Inc. is required
to take a drug screening test. Refusal to take the test, or if the test results
show evidence of use of drugs will cause that candidate not to be employed.
Under current Federal regulations, AAF-McQuay, Inc. may hire only citizens or
aliens who are authorized to work in the United States. If you accept an offer
from AAF-McQuay Inc., before you will be placed on the payroll, you will be
required to document that you are a U.S. citizen or an alien authorized to work
in the United States. One of the following documents must be reviewed before you
can begin employment: a U.S. passport, a Certificate of U.S. Citizenship, a
Certificate of Naturalization, or an unexpired foreign passport with an attached
Employment Authorization, or other acceptable documentation.
We understand your start date to be January 5, 1997. We feel we have an exciting
and challenging opportunity for you and we are looking forward to having you
join us.
Sincerely,
Gary Boyd
Vice President, Human Resources
GB:kh
cc: Joseph Hunter
<PAGE>
Exhibit 10.29
AGREEMENT TO FULLY VEST RIGHTS
UNDER THE
EXECUTIVE SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made effective May 22, 1998, by and between Gerald L. Boehrs
("Executive") and AAF-McQuay Inc. ("Corporation"), as successor to SnyderGeneral
Corporation.
RECITALS
A. Executive and SnyderGeneral Coporation entered into the Executive Salary
Continuation Agreement ("ESCA") effective January 1, 1990, as amended by the
NEPI Modification Agreement dated as of May 2, 1994, providing for certain
payments to be made to Executive in certain circumstances upon Executive leaving
the employment of SnyderGeneral Corporation.
B. As part of the sale of all of its outstanding stock in a transaction dated
May 2, 1994, SnyderGeneral Corporation changed its name to AAF-McQuay Inc.
C. Corporation has requested that Executive relocate and assume new job
responsibilities on behalf of the Corporation and as an incentive has agreed to
enter into this Agreement with Executive regarding the full vesting of
Executive's right to payments under the ESCA.
D. Executive has agreed to relocate and accept new job responsibilities and, as
partial consideration therefore, has agreed to accept the rights vested under
the terms of this Agreement and the ESCA.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, the parties agree as follows:
AGREEMENT
1. The Corporation acknowledges and agrees that from and after the date of this
Agreement, Executive shall be fully vested in all rights applicable to Executive
under the ESCA upon Executive's termination of employment with the Corporation,
whether voluntarily or involuntarily, with or without Good Cause, or due to
disability or death, as if the Executive had attained the age of sixty-five (65)
years at the time of termination, whether or not he shall have in fact attained
such age.
2. Nothing in this Agreement shall be construed as requiring Executive to retire
or otherwise terminate his employment with the Corporation at any particular
time, and Executive shall continue to work for the Corporation for so long as
both parties mutually agree.
<PAGE>
3. Notwithstanding the full vesting of Executive's rights in the ESCA under the
terms of this Agreement, Executive shall not be entitled to any right or benefit
not otherwise available under the ESCA, and the terms of Sections 12.01 and
12.02 of the ESCA (pertaining to the nature of the relationship created by the
ESCA and Executive's right to payment against the general creditors of the
Corporation) shall remain unaffected by this Agreement. The benefits payable
under the ESCA shall not begin until Executive has actually terminated his
employment with the Corporation.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the day first noted above.
GERALD L. BOEHRS AAF-McQUAY INC.
______________________________ By _______________________________
Title ______________________________
2
<PAGE>
Exhibit 10.30
AMENDED AND RESTATED
TAX INDEMNIFICATION AGREEMENT
AAF-McQUAY HOLDINGS, INC., A TEXAS CORPORATION,
AAF-McQUAY INC., A DELAWARE CORPORATION,
RICHARD W. SNYDER,
ROBERTA M. SNYDER,
THE RICK SNYDER IRREVOCABLE TRUST DATED DECEMBER 27, 1991,
THE SHELLEY HALL IRREVOCABLE TRUST
DATED DECEMBER 29, 1993,
THE ROB SNYDER IRREVOCABLE TRUST DATED DECEMBER 27, 1991,
THE TAMMY SNYDER IRREVOCABLE TRUST
DATED DECEMBER 27, 1991,
THE JORDAN MARIE SNYDER IRREVOCABLE TRUST
DATED DECEMBER 27, 1991,
THE ZACHARY AUSTIN SNYDER IRREVOCABLE TRUST
DATED DECEMBER 29, 1993,
THE STACEY SNYDER IRREVOCABLE TRUST
DATED DECEMBER 27, 1991,
THE ARNOLD VERBEEK IRREVOCABLE TRUST
DATED DECEMBER 27, 1991,
LEONARD LEWIS SNYDER, JR.,
AND
BEULAH STRIETER SNYDER
<PAGE>
AMENDED AND RESTATED
TAX INDEMNIFICATION AGREEMENT
This Amended and Restated Tax Indemnification Agreement (the
"Agreement") is made and entered into on the 8th day of July, 1998, by and among
AAF-McQuay Inc., a Delaware corporation ("AMI"), AAF-McQuay Holdings, Inc., a
Texas corporation, Richard W. Snyder and Roberta M. Snyder, both individuals
residing in Dallas County, Texas (collectively, the "Snyders"), The Rick Snyder
Irrevocable Trust dated December 27, 1991, The Shelley Hall Irrevocable Trust
dated December 29, 1993, The Rob Snyder Irrevocable Trust dated December 27,
1991, The Tammy Snyder Irrevocable Trust dated December 27, 1991, The Jordan
Marie Snyder Irrevocable Trust dated December 27, 1991, The Zachary Austin
Snyder Irrevocable Trust dated December 29, 1993, The Stacey Snyder Irrevocable
Trust dated December 27, 1991, The Arnold Verbeek Irrevocable Trust dated
December 27, 1991 (collectively, the "Trusts"), and Leonard Lewis Snyder, Jr.
and Beulah Strieter Snyder, both individuals residing at Fort Wayne, Indiana
(the "Individual Minority Shareholders") (the Snyders, the Trusts, and the
Individual Minority Shareholders collectively referred to hereinafter as the
"Shareholders" and, collectively with AMI and AAF-McQuay Holdings, Inc., the
"Parties").
W I T N E S S E T H:
WHEREAS, during the period beginning March 29, 1987, in the case of
SnyderGeneral Corporation (subsequently renamed "AAF-McQuay Inc."), a Delaware
corporation, and November 26, 1986, in the case of SnyderGeneral Holding Company
(subsequently renamed "AAF-McQuay Holdings, Inc."), a Texas corporation (each a
"Company" and, collectively, the "Companies"), and continuing until the
termination of the applicable election pursuant to the disposition of the
Shareholders' interests in the Companies on May 2, 1994 (for each of the
Companies, the corresponding "S Corporation Period"), each of the Companies
maintained an election to be taxed as a "subchapter S corporation" pursuant to
sections 1361 and 1362 of the Code (as hereinafter defined) (such elections
collectively referred to in this Agreement as the "S Elections"); and
WHEREAS, the Companies historically had distributed cash to the
Shareholders in amounts intended to correspond with the federal and state income
taxes imposed on the Shareholders and attributable to the Companies' respective
taxable incomes; and
WHEREAS, the Shareholders also historically had remitted to the
Companies, when received from the various taxing authorities, refunds of
overpayments of such federal and state income taxes attributable to the
Companies' taxable incomes; and
WHEREAS, pursuant to that certain Stock Purchase Agreement dated as of
March 31, 1994 by and among O.Y.L. Industries Berhad, the Shareholders,
SnyderGeneral Corporation, Michael Caolo, Jr., Barton L. Bailey, Gerald L.
Boehrs, James F. Brum, Dick W. Driggs, Norbert O. Grohmann, Bruce E. Hebert, and
Charles J. Tambornino (the "Stock Purchase Agreement"), and that certain
Redemption and Asset Transfer Agreement dated as of May 2, 1994, by and among
the Companies and the Shareholders, the Shareholders disposed of their interests
in the Company; and
WHEREAS, on May 2, 1994, the Parties entered into that certain Tax
Indemnification Agreement (the "Original Agreement") for the purpose of setting
forth their agreements with respect to, among other things, the federal and
state income tax liabilities associated with the S Elections; and
WHEREAS, AMI, the Snyders, and certain other parties are entering into
a Settlement Agreement and Complete and Permanent Release dated as of July 8,
1998, to which this Agreement is ancillary and which shall terminate the rights
and obligations of the parties under the Stock Purchase Agreement; and
<PAGE>
WHEREAS, the Parties desire to enter into this Agreement for the
purpose of making certain amendments to the terms of the Original Agreement, and
to adopt the terms of this Agreement as the complete expression of their
covenants, agreements, and undertakings with respect to its subject matter,
thereby superseding the Original Agreement in its entirety;
NOW, THEREFORE, the Shareholders, on behalf of themselves and their
respective heirs, personal and legal representatives, successors, and assigns,
and AMI and AAF-McQuay Holdings, Inc., on behalf of themselves and their present
and future subsidiaries, successors, and assigns, enter into this Agreement:
1. Definitions. As used in this Agreement, the following terms have the
following meanings (such meanings to be equally applicable to both the singular
and the plural forms of the terms defined):
(a) "Code" means the Internal Revenue Code of 1986, as
amended, and includes corresponding provisions of any subsequently enacted
federal tax laws.
(b) "Final Determination" means the final resolution of the
liability for Tax for any taxable period affected by the allocation of Company
Tax Items to the Shareholders (i) by IRS Form 870 or 870-AD (or any successor
forms thereto) on the date of acceptance by or on behalf of the IRS with respect
to United States federal Taxes, or by a comparable form under the laws of any
other jurisdictions; except that a Form 870 or 870-AD or comparable form that
reserves (whether by its terms or by operation of law) the right of the taxpayer
to file a claim for refund and (or) the right of the taxing authority to assert
a further deficiency for any Tax shall not constitute a Final Determination for
such Tax until the expiration of the applicable statute of limitations; (ii) by
a decision, judgment, decree, or other order by a court of competent
jurisdiction that has become final and unappealable; (iii) by a closing
agreement or accepted offer in compromise under section 7121 or section 7122 of
the Code with respect to federal Taxes, or comparable agreements as to other
Taxes under the laws of any other jurisdictions; (iv) by an allowance of a
refund or credit in respect of any overpayment of Tax, but only after the
expiration of all periods during which such refund may be recovered by the
jurisdiction assessing or imposing any such Tax; or (v) by any other final
disposition, including by reason of the expiration of the applicable statute of
limitations.
(c) "IRS" means the Internal Revenue Service, U.S. Department
of the Treasury.
(d) "Shareholder Income Tax Liability" with respect to either
Company from time to time means (i) liabilities, whether as reported on an
original or amended Tax Return filed after May 2, 1994, or upon a Final
Determination occurring after May 2, 1994, and including estimated liabilities
to the extent amounts are required to be paid on an estimated basis after the
date of this Agreement, for all applicable federal and state income taxes,
however denominated, imposed as a result of the attribution to the Shareholders
of Company Tax Items under the provisions of subchapter S of the Code or
analogous state income Tax laws, computed as hereinafter provided, plus (ii) any
interest, penalties, additions to Tax, or additional amounts with respect
thereto. Shareholder Income Tax Liability also includes liabilities for Taxes
imposed on a Shareholder attributable to the Shareholder's receipt of interest
properly allocable to a Tax Refund. Shareholder Income Tax Liability shall be
determined under all applicable provisions of the Code and state income tax
laws, taking into account all attributes resulting from or arising out of a
Shareholder's status as such under subchapter S of the Code or analogous state
income tax laws for any S Corporation Period, including, without limitation, net
operating loss carryovers and carrybacks, losses that are suspended under Code
section 1366(d), and credits under Code section 53 for alternative minimum taxes
paid. The liabilities for federal and state income Taxes imposed as a result of
the attribution to the Shareholders of Company Tax Items under subchapter S of
the Code shall be computed as the increase in Tax owed to a taxing authority by
a Shareholder and attributable to such Company Tax Items. In the case of an
original Tax Return filed after May 2, 1994, such increase in Tax shall be equal
to the liability of the Shareholder attributable to all such Company Tax Items
as reported on that return. In the case of an amended Tax Return filed after May
2, 1994, such increase in Tax shall be measured as the liability of the
Shareholder attributable to all such Company Tax Items as reported on the
amended Tax Return in excess of the total amount of Tax paid in respect of the
original Tax Return or previously filed amended Tax Return for the same taxable
period. In the case of a Final Determination
<PAGE>
occurring after May 2, 1994, such increase in Tax shall be measured as the
liability of the Shareholder resulting therefrom and attributable to all such
Company Tax Items in excess of the total amount of Tax paid in respect of the
applicable original or amended Tax Return, whichever the case may be. This same
method shall be employed, mutatis mutandis, in computing the amount of Tax
Distributions required in respect of estimated tax payments made after the date
of this Agreement or in respect of the "gross-up" component thereof referred to
in clause (iii) of subsection 3(a). Shareholder Income Tax Liability, as
computed in accordance with the foregoing provisions of this subsection 1(d),
shall encompass only amounts actually owed by a Shareholder to a taxing
authority on or after May 2, 1994, with respect to Tax Returns (whether original
or amended) filed, or Final Determinations occurring, after May 2, 1994.
(e) "Tax" or "Taxes" means any federal or state tax imposed on
or measured by net income or a taxable base in the nature of net income,
including, without limitation, the taxes imposed by subtitle A of the Code.
(f) "Tax Distributions" means the payments required to be made
by AMI to the Shareholders pursuant to section 3 of this Agreement.
(g) "Tax Item" means any item of income, gain, loss,
deduction, credit, recapture of credit, or any other item that increases or
decreases Taxes paid or payable, including an adjustment under Code section 481
resulting from a change in accounting method, and whether as originally
reported, as amended, or upon a Final Determination.
(h) "Tax Refund" means a Shareholder's receipt of a refund of
Tax (or an allowance of a credit against other Shareholder Taxes by a taxing
authority) after May 2, 1994 for any taxable period (including, without
limitation, taxable periods of the Shareholders subsequent to the S Corporation
Periods) attributable to or arising out of: (i) adjustments of Company Tax Items
resulting from a Final Determination, or (ii) an original or amended Company Tax
Return (and a corresponding original or amended Shareholder Tax Return). A "Tax
Refund," for the purposes of this Agreement, also includes any reduction in
capital gains Tax from the disposition of the Shareholders' interests in the
Companies (a) attributable to the Shareholders' remittance of any amount to AMI
in respect of Tax Refunds, as required by section 3(b) or 3(c) of this
Agreement, or (b) to the extent that the attribution of additional taxable
income or gain to the Shareholders results in increased tax basis in the shares
of common stock of the Companies. The term "Tax Refund" also includes any
interest properly allocable to such refund of Tax and any reduction of penalties
or additions to tax previously paid and properly allocable to Company Tax Items.
For the purposes of the first sentence of this section 1(h) , a Tax Refund shall
be computed as the decrease in Tax owed to a taxing authority by a Shareholder
and attributable to such Company Tax Items. In the case of an original or
amended Shareholder Tax Return filed after May 2, 1994, such decrease in Tax
shall be equal to the overpayment of Tax shown on that return attributable to
all such Company Tax Items. In the case of a Final Determination occurring after
May 2, 1994, such decrease in Tax shall be measured as the overpayment of Tax
resulting therefrom and attributable to Company Tax Items in excess of the total
amount of Tax paid in respect of the applicable original or amended Shareholder
Tax Return, whichever the case may be.
(i) "Tax Return" means any return, claim for refund, form,
filing, questionnaire, or other document required to be filed (or that may be
filed), including requests for extensions of time, filings made with estimated
tax payments, and amended returns that may be filed for any period with any
taxing authority in connection with any Tax or Taxes (whether or not a payment
is required to be made with respect to such filing).
2. General Intent; Rule of Construction. It is the general intent of
the parties to this Agreement that AMI shall economically bear the burden of all
Taxes imposed on the Shareholders attributable to the Companies' Tax Items with
respect to taxable periods, or portions of taxable periods, ending on or before
the termination of the applicable S Corporation Period, together with any
interest, penalties, additions to tax, or additional amounts or costs with
respect thereto, and that the Shareholders shall remit to AMI all refunds, when
received, of overpayments of Taxes attributable to the Companies' Tax Items,
together with any properly allocable interest and reductions of penalties or
additions to tax previously paid. This Agreement shall be construed accordingly.
<PAGE>
3. Tax Distributions and Tax Refund Remittances.
(a) AMI shall make Tax Distributions to the Shareholders in an
amount equal to the sum of (i) the Shareholder's Shareholder Income Tax
Liability, plus (ii) the amount of all reasonable and necessary expenses,
reasonable and necessary attorneys' fees, and reasonable and necessary
accountants' fees incurred by the Shareholder in connection with or as a result
of the attribution of the Company's Tax Items to him, her, or it, plus (iii)
such amount as will reimburse the Shareholder for the amount of any and all
additional federal and state Taxes payable by him, her, or it as a result of the
Shareholder's receipt of all amounts due under this paragraph (a).
(b) Subject to section 3(d) of this Agreement, each
Shareholder shall promptly remit to AMI any Tax Refund received after May 2,
1994, within ten (10) days of receipt (or realization in the case of a reduction
of Tax occurring after May 2, 1994, that does not result in the refund of an
overpayment of Tax). Each Shareholder shall timely take all steps reasonably
necessary to preserve his, her, or its claims for refunds of Tax and to secure
the maximum reduction in Taxes attributable to a Company's Tax Items; provided,
however, that, to the extent a Shareholder incurs out-of-pocket expenses
(including reasonable and necessary accountants' and attorneys' fees) in
preserving or securing such refunds of Tax, AMI shall reimburse the Shareholder
for those expenses within ten (10) days of receiving notice that the Shareholder
has paid the expense.
(c) Notwithstanding anything contained herein, including the
provisions of paragraphs (a) and (b) immediately above, if (i) that certain
Agreement as to Final Determination of Tax Liability executed and delivered by
the Snyders to the IRS on or about October 31, 1997, (ii) that certain Agreement
as to Final Determination of Tax Liability and Specific Matters executed and
delivered by AMI to the IRS on or about October 31, 1997, and (iii) that certain
Agreement as to Final Determination of Tax Liability and Specific Matters
executed and delivered by AAF-McQuay Holdings, Inc. to the IRS on or about
October 31, 1997 (such agreements hereinafter collectively referred to as the
"Closing Agreements"), are executed and delivered by the IRS to the applicable
party, and thus become effective, then in lieu of the payments required to be
made pursuant to paragraphs (a) and (b) immediately above with respect to
federal Taxes only, the Shareholders shall pay to AMI those amounts set forth on
Schedule B attached hereto opposite the label "Net due to AMI" for each of the
Shareholders' taxable years 1987 through and including 1995 and opposite the
label "Net due to AMI" under the heading "Adjustments to Capital Gain on Stock
Sale," as such amounts are adjusted pursuant to the following sentence. The
above-described amounts set forth opposite "Net due to AMI" shall be adjusted as
appropriate to reflect changes in federal tax rates applicable to capital gains
and ordinary income, and statutory interest on deficiencies and refunds
determined under applicable provisions of the Code, and shall be further
adjusted as appropriate for corresponding changes in the "39.6% Tax on interest
refund." In addition, the amounts set forth opposite "Net due to AMI" shall be
adjusted as appropriate to reflect any changes made by the IRS under applicable
law to the amounts set forth opposite the label "Account balance as of October
31, 1997." Payments required to be made by the Shareholders to AMI pursuant to
this paragraph (c) shall be made within ten (10) days of the receipt of the
overpayments identified on Schedule B or within ten (10) days of realization of
the amount labeled as "Adjustments to Capital Gain on Stock Sale" shown thereon.
Following receipt by AMI of all payments required to be made by the Shareholders
pursuant to this paragraph (c), neither AMI nor the Shareholders shall have any
further obligations to, or claims against, each other in respect of Tax
Distributions for federal Taxes or remittances of refunds of federal Taxes or of
federal Tax benefits realized, notwithstanding any other provision of this
Agreement to the contrary.
(d) If at the time AMI is obligated to make a Tax Distribution
to a Shareholder, the Shareholder is obligated to remit a Tax Refund to AMI,
then any distribution by AMI or any remittance by the Shareholder, as the case
may be, shall be on a net basis.
(e) Upon request by AMI, a Shareholder shall provide
substantiation in reasonable detail for any expenses for which reimbursement is
sought pursuant to this section 3. In addition, a Shareholder shall provide AMI
with copies of any Tax Return filed by the Shareholder (including supporting
work papers and an associated IRS Form 8821) and copies of any communications
between the Shareholder and the applicable taxing authorities to the extent
reasonably deemed relevant by AMI in determining whether the Shareholder has
realized a Tax Refund that he, she, or it is obligated to remit to AMI under
this section 3.
<PAGE>
(f) Payments or remittances made pursuant to this section 3
shall be treated by the Shareholders as adjustments to the purchase price for
their share interests.
4. Ratification of Prior Tax Distributions and Tax Refund Remittances.
Notwithstanding any provision of this Agreement to the contrary other than the
provisions of section 3(c), by entering into this Agreement the Parties agree
that all distributions to the Shareholders in respect of Taxes made by the
Companies prior to May 2, 1994, and all refunds of Tax remitted to the Companies
by the Shareholders prior to May 2, 1994, were correct in their amounts when
made or remitted, are final, are not subject to adjustment, and, accordingly,
are hereby ratified, confirmed, and approved by all Parties such that AMI and
the Shareholders shall have no further obligations to, or claims against, one
another with respect to Tax Distributions or remittances of Tax Refunds made, or
that should have been made, on or before May 2, 1994. This section 4 shall have
no applicability to Shareholder Tax liabilities arising, or Tax Refunds received
or realized by the Shareholders, after May 2, 1994.
5. Payment. Any payment required to be made by AMI pursuant to section
3 of this Agreement shall be made within ten (10) days after a Shareholder has
provided (i) written notice to AMI of its obligation to make such a payment, and
(ii) except for Tax payments that are required to be made on an estimated basis,
a copy of the Tax Return or other reasonably satisfactory document evidencing
the corresponding liability to a federal or state taxing authority. Any
remittance required to be made by a Shareholder pursuant to section 3 of this
Agreement shall be made within the time period specified in Section 3(b). Any
payment or remittance required under section 3 not so made shall thereafter bear
interest at two percentage points (2%) above the federal short-term rate
established pursuant to section 6621 of the Code until such payment is actually
made. AMI's obligation to make Tax Distributions to the Shareholders, and each
Shareholder's obligation to remit Tax Refunds to AMI, is absolute and
unconditional and shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense, or other right that
AMI may have against a Shareholder or anyone else, or other right that a
Shareholder may have against AMI or anyone else, excepting, however, to the
extent, and only to the extent, as otherwise provided in subsection 3(d).
6. Preparation and Filing of Tax Returns. All Tax Returns contemplated
by this Agreement shall be prepared in accordance with applicable law and shall
be filed on a timely basis (including pursuant to allowed extensions) by the
Party responsible for such filing under applicable law. In addition, to the
extent applicable, all such affected Tax Returns shall be prepared in a manner
consistent with the Closing Agreements, unless prior to the filing of any such
Tax Return the IRS shall have notified AMI or the Snyders that it does not
intend to execute the Closing Agreements. Subject to the requirements of the
immediately preceding sentence, (i) in the absence of a controlling change in
law or circumstances, or except as otherwise agreed in writing by AMI and the
Shareholders, all Tax Returns filed after the effective date of this Agreement
shall be prepared on a basis consistent with the elections, accounting methods,
conventions, and principles of taxation used for the most recent taxable periods
for which Tax Returns involving similar Tax Items have been filed, and (ii)
subject to the provisions of this Agreement, all decisions relating to the
preparation of Tax Returns shall be made in the sole discretion of the Party
responsible for such preparation under applicable law.
7. Tax Audits and Controversies.
(a) In the event that AMI or a Shareholder receives notice of
a pending or threatened Tax audit or of an assessment that could give rise to a
Shareholder Income Tax Liability (referred to in this Agreement as a "Potential
Tax Claim"), the recipient shall give notice thereof to the other Party as
promptly as practicable; provided, however, that the Parties agree that the
Shareholders need not give notice to AMI with respect to the fact of the
potential assessments of various state Tax liabilities arising out of the Final
Determinations reflected in the Closing Agreements. The notice required to be
given by the Shareholders and AMI under this paragraph is referred to in this
Agreement as the "Potential Tax Claim Notice." A Potential Tax Claim Notice
shall contain all information known to the Party giving the notice pertaining to
the Tax liability in question. The failure to provide a Potential Tax Claim
Notice
<PAGE>
shall excuse the Party that would have received such notice from liability under
this Agreement to the extent that such failure is prejudicial to that Party.
(b) AMI shall, at its election, have the primary right to
represent the Shareholders' interests in any Tax inquiry, investigation, audit,
or administrative or court proceeding (collectively, a "Proceeding") relating to
a Potential Tax Claim or any challenge to a Company's S corporation status,
including the right to (i) employ counsel of its choice reasonably acceptable to
the Snyders at its expense, and (ii) subject to the exceptions provided
hereinafter, to control the conduct of the Proceedings, including the settlement
or other disposition thereof. AMI shall, however, (x) reasonably and in good
faith consult with the Snyders with respect to the defense against, or
compromise of, the Potential Tax Claim to the extent that an adverse resolution
of such Proceeding might adversely affect the Shareholders (directly or
indirectly), (y) afford the Shareholders the right to have representatives
reasonably satisfactory to AMI attend all administrative conferences, hearings,
appeals, or other proceedings or conferences with any taxing authority in
respect of any Potential Tax Claim (with timely notice of such proceedings being
provided to the Snyders), and (z) provide the Shareholders the opportunity to
review and discuss any settlement offer proposed to be made by AMI.
(c) In the event that a Shareholder reasonably believes that
AMI may not have adequate resources to pay the amount of a Potential Tax Claim
reasonably likely to become due, he may request the primary right to represent
the Shareholders' interests in the affected Proceeding. Such right shall not
arise, however, if within thirty (30) days of such request, AMI delivers to such
Shareholder a sworn certificate of AMI's chief financial officer stating that
AMI has and expects to continue to have resources available to pay in full the
amount of the Potential Tax Claim.
(d) In the event that AMI wishes to settle or compromise any
Proceeding by making or accepting an offer or compromise ("Offer"), it shall
provide notice containing full particulars concerning the Offer to the
Shareholders. If the Shareholders disapprove the Offer within twenty (20) days
of the receipt of the notice referred to in the preceding sentence (the failure
to disapprove the Offer in writing within such time being deemed the approval
thereof), AMI may not settle such Proceeding; and the Shareholders shall
thereafter have the primary right at their expense to represent their interests,
which may as a matter of fact involve representation of a Company in such
Proceeding (with AMI having the rights described in clauses (x), (y), and (z) of
paragraph (b) hereof) upon receipt of an instrument from the Shareholders by
which they agree to indemnify and hold harmless AMI for any Taxes in excess of
the amount specified in the Offer resulting therefrom. If the ultimate
resolution of the Tax claim exceeds the amount specified by the Offer, then
AMI's liability under this Agreement shall not exceed the amount specified in
the Offer. Notwithstanding the foregoing provisions to the contrary, this
paragraph (d) shall be applicable to Proceedings involving (i) federal Tax only
if the Closing Agreements are not executed and delivered by the IRS, and (ii)
state Tax only if the liability of the Shareholders that would result from the
settlement or compromise of a particular Proceeding in accordance with the Offer
is reasonably expected to exceed $100,000.
(e) Notwithstanding anything to the contrary in this
Agreement, if in any Proceeding the nature of which is litigation involving the
correctness of a denial of a refund by a taxing authority, and the Shareholder
made the payment to the taxing authority that forms the basis for such refund
claim, then the Shareholders shall receive any and all refunds of their Taxes
that result from the ultimate resolution of the Proceeding; and the Shareholders
shall have no duty to reimburse or refund to AMI any portion of the refund that
is the subject matter of the Proceeding unless the refund is attributable to a
Tax Distribution made to the Shareholders after May 2, 1994.
8. Disallowance of S Election.
(a) In the event of a Final Determination that a Company was
not, for any taxable year during the applicable S Corporation Period, a
qualifying S corporation as defined in section 1362 of the Code or similarly
qualified under any parallel provision of applicable state law, then the
Shareholders shall (i) promptly use reasonable best efforts to obtain refunds
from the applicable taxing authorities of all Taxes paid with respect to the
imputation to such Shareholders of income or gain resulting from S corporation
status for such year, (ii) upon receipt, promptly deliver to AMI an amount equal
to such refunds received, together with any interest paid thereon, (iii) use
their reasonable best efforts to obtain the benefit of a deduction for the
transfer of amounts described in clauses (ii) and (iv) to AMI, and (iv) further
<PAGE>
deliver to AMI an amount equal to any tax benefit realized by them by reason of
such deduction referred to in clause (iii); provided, however, that amounts
payable pursuant to clauses (ii) and (iv) hereof shall not exceed the amount of
a Company's Tax with respect to the income and gain for the period for which its
S corporation status was disallowed.
(b) In the event that the refunds described in paragraph (a)
receivable by the Shareholders with respect to any taxable year or years that
are the subject of a Tax audit or controversy can reasonably be expected to
exceed $100,000, AMI shall have the primary right to represent the Shareholders'
interests in (i) seeking such refund, including in any related Proceeding, and
(ii) conducting any Proceeding relating to the allowability of the deduction
described in paragraph (a)(iii), but only as such Proceeding relates to the
allowability of said deduction, in both cases in accordance with the provisions
of section 7.
(c) Promptly upon becoming aware of any threatened or actual
challenge to a Company's S corporation status for any taxable year, the
Shareholders shall take the necessary actions to preserve their claims for
refunds of Taxes described in paragraph (a); the representation rights referred
to in paragraph (b) of this section shall apply for this purpose.
(d) For the purposes of this section 8, "S corporation status"
means the status of a Company as an electing subchapter S corporation under
section 1362 of the Code or an equivalent status under a parallel provision of
state law.
9. Cooperation in Return Filings, Examinations, and Controversies. AMI,
each Shareholder, and its or his representatives shall cooperate fully in a
prompt and timely manner in connection with (A) the preparation and filing of,
and (B) any inquiry, audit, examination, investigation, dispute, or litigation
involving, any Tax Return filed or required to be filed (under either applicable
law or the terms of this Agreement) with respect to any S Corporation Period or
other taxable period of which the liability for, or the overpayment of, Tax is
directly or indirectly affected by the attribution to the Shareholders of
Company Tax Items. Such cooperation shall include, but not be limited to, (i)
the execution and delivery to AMI by the appropriate Shareholder of any power of
attorney or other document necessary to allow AMI and its counsel to participate
on behalf of the Shareholder in any Proceeding and to assume the defense or
prosecution, as the case may be, of any Proceeding pursuant to the terms of
section 7 of this Agreement, (ii) the execution and delivery to the Shareholder
by AMI of any power of attorney or other document necessary to allow the
Shareholder and his or its counsel to participate on behalf of AMI in any
Proceeding and to assume the defense or prosecution, as the case may be, of any
Proceeding pursuant to the terms of section 7 of this Agreement, (iii) making
available, during normal business hours, and within ten (10) days of any request
therefor, all books, records, and information (which books, records, and
information may be copied by the requesting Party at his or her expense), and
the assistance of all officers and employees, reasonably necessary or useful in
connection with any Proceeding, and (iv) the giving of testimony and the
production of witnesses as reasonably necessary in connection with any
Proceeding. AMI and the Shareholders agree to make available to each other and
to any taxing authority, as reasonably requested, all information, records, or
documents relating to federal, state, county, local, or foreign Tax matters of
the Companies for all S Corporation Periods. AMI and the Shareholders agree to
keep confidential the contents of the information, records, and documents made
available under this provision and to not use or disclose them or any
information contained therein; provided, however, that: (i) the Snyders may
disclose those portions of such information pertaining to the Snyders, (ii) AMI
may disclose those portions of such information, records, or documents that
disclose information pertaining to the Companies or any of their subsidiaries,
and (iii) both the Snyders and AMI may disclose any of such information,
records, or documents where such disclosure is made (A) to a taxing authority,
(B) in the course of any judicial proceeding for the determination of liability
for Taxes, (C) otherwise as required by law, or (D) any such information,
records, or documents that has or have become generally available to the public
through no fault of the Party seeking to make the disclosure.
10. Retention of Books and Records. Except as provided on the attached
Schedule A to this Agreement, AMI and each Shareholder agrees to retain all Tax
Returns, related schedules and workpapers, and all material records and other
documents relating thereto existing on May 2, 1994, or created through or with
respect to all S Corporation Periods or other taxable period of which the
liability
<PAGE>
for, or the overpayment of, Tax is directly or indirectly affected by the
attribution to the Shareholders of Company Tax Items, until the last to occur of
(i) the expiration of the statute of limitations (including extensions) of the
taxable year to which such Tax Returns and other documents relate, or (ii) one
(1) year following a Final Determination of any Proceeding affecting a Tax Item
to which such document relates, or (iii) six (6) years from the date of this
Agreement. AMI shall retain all existing files relating to each Company's Taxes
and Tax Returns.
11. Breach. Any Party that breaches any obligation under this Agreement
indemnifies and holds harmless the other Parties from and against any payment
required to be made as a result of the breach.
12. Remedies. The Parties to this Agreement recognize that failure to
comply with their respective obligations under this Agreement may result in
irreparable harm to the other Parties, and that the other Parties may not be
adequately compensated by monetary damages for such failure. If any Party fails
to comply with its obligations under this Agreement, then the other Parties
shall be entitled to injunctive relief and specific performance in addition to
all other remedies.
13. Expenses. Unless otherwise expressly provided in this Agreement,
each Party shall bear any and all expenses that arise from its obligations under
this Agreement. In addition, AMI and the Shareholders agree that each shall bear
the legal and professional fees and expenses incurred by it, him, or her in
connection with the negotiation and drafting of this Agreement.
14. Entire Agreement; Termination of Prior Agreements. This Agreement
constitutes the entire agreement of the parties concerning the subject matter of
this Agreement and supersedes all other agreements, whether or not written, in
respect thereof. This Agreement may not be amended except by an agreement in
writing, signed by all the Parties to this Agreement. Anything in this Agreement
to the contrary notwithstanding, in the event and to the extent that there is a
conflict between the provisions of this Agreement and any other agreement, the
provisions of this Agreement shall control.
15. Notices. All notices and other communications required under this
Agreement shall be in writing and shall be delivered by hand, or mailed by
registered or certified mail (return receipt requested), to the Parties at the
following addresses (or at such other addresses for a Party as may be specified
by like notice) and shall be deemed given on the date on which such notice is
received:
If to AMI or to AAF-McQuay
Holdings, Inc.: 111 South Calvert Street, Suite 2800
Baltimore, Maryland 21202
If to the Snyders: 4475 Royal Lane Parkway
Dallas, Texas 75229
With copies to: Patrick T. Noonan, Jr.
3219 McKinney Avenue
Dallas, Texas 75204
W. Thomas Finley, Esq.
Bell, Nunnally & Martin PLLC
3232 McKinney Avenue, Suite 1400
Dallas, Texas 75204-2429
D. Markham Bader, Jr., C.P.A.
Bader & Associates, P.C.
Heritage Square I
4835 LBJ Freeway, Suite 460
<PAGE>
Dallas, Texas 75244
If to the Trusts: 4475 Royal Lane Parkway
Dallas, Texas 75229
If to the Minority Shareholders: 516 Corwin Lane
Fort Wayne, Indiana 46816
If the last day for providing any notice, communication, or payment under this
Agreement is a Saturday, a Sunday, or a legal holiday, then such due date shall
be extended to the next business day.
16. Arbitration To Enforce Agreement.
(a) The Parties specifically agree that any controversy,
claim, or dispute arising out of this Agreement, or any alleged breach of this
Agreement, shall be resolved exclusively by arbitration. Any arbitration shall
take place at Dallas, Texas, and be administered by the Dallas office of the
American Arbitration Association (the "AAA") in accordance with its Commercial
Arbitration Rules in effect at the time the arbitration is initiated
(collectively, the "Rules").
(b) As soon as a demand for arbitration is made by any Party,
the AAA shall proceed to provide a list of arbitrators from the Commercial Panel
from which the Parties shall select a panel of three neutral arbitrators in
accordance with the Rules and the normal procedures of the Dallas office of the
AAA. If necessary, the AAA may select some or all of the arbitrators when it is
authorized to do so under the Rules.
(c) The arbitration panel shall render a full, complete,
conclusive, and binding resolution of the dispute. The arbitration award shall
assess all reasonable attorneys' fees and costs, including the costs of the
arbitration and the arbitrators' compensation, against the losing Party.
Judgment on the award may be entered in any court having jurisdiction thereof.
17. Application to Present and Future Affiliates and Successors. This
Agreement is being entered into by AMI and by AAF-McQuay Holdings, Inc. and by
each Shareholder on behalf of themselves. This Agreement shall inure to the
benefit of, and be enforceable by, a Shareholder's personal and legal
representatives, successors, and assigns. This Agreement shall constitute a
direct obligation of each Party. This Agreement shall inure to the benefit of,
and be binding upon, AMI, AAF-McQuay Holdings, Inc., and their successors. AMI
shall require any successor to all or substantially all of the business and (or)
the assets of AMI or of AAF-McQuay Holdings, Inc., whether directly or
indirectly, by purchase, merger, consolidation, acquisition of stock, or
otherwise, by an agreement in form and substance satisfactory to each
Shareholder, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent as AMI or AAF-McQuay Holdings, Inc. would be
required to perform it if no such succession had taken place.
18. Term. This Agreement shall continue in effect until six (6) months
following the expiration of the last to expire of the applicable statutes of
limitations for assessment and collection with respect to all taxable periods of
which the liability for, or the overpayment of, Tax is directly or indirectly
affected by the attribution to the Shareholders of Company Tax Items, or as
otherwise agreed to in writing by all the parties.
19. Legal Enforceability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement. Any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
20. Titles and Headings. Titles and headings to sections herein are
inserted for the convenience of reference only and are not intended to be a part
or to affect the meaning or interpretation of this Agreement.
<PAGE>
21. Singular and Plural. As used herein, the singular includes the
plural and vice versa.
22. Governing Law. This Agreement shall be governed by the laws of the
State of Texas without regard to its principles of conflict of laws, taking into
account applicable tax law contemplated by the terms hereof. The obligations and
undertakings of each of the parties to this Agreement shall be performable in
Dallas County, Texas, alone.
23. Exclusive Jurisdiction. The Parties intend that any dispute
regarding this Agreement be resolved by arbitration as provided in section 16;
but to the extent that any Party seeks a judicial determination of the meaning
of section 16 or seeks to compel, prevent, or limit a pending arbitration, the
Parties agree that any such suit, action, or proceeding shall be brought in the
courts of the State of Texas, County of Dallas, or in the United States District
Court for the Northern District of Texas; and each Party by this Agreement
hereby submits to the exclusive jurisdiction of such courts for the purpose of
any such suit, action, or proceeding relating to this Agreement.
IN WITNESS WHEREOF, this Amended and Restated Tax Indemnification
Agreement has been duly executed on July 8, 1998.
AMI:
AAF-McQUAY INC.
By: /s/ Dixie L. Randle
Name: Dixie L. Randle
Title: General Counsel and
Assistant Secretary
AAF-McQUAY HOLDINGS, INC.
By: /s/ Dixie L. Randle
Name: Dixie L. Randle
Title: General Counsel and
Assistant Secretary
THE SNYDERS:
/s/ Richard W. Snyder
Richard W. Snyder
/s/ Roberta M. Snyder
Roberta M. Snyder
THE TRUSTS:
THE RICK SNYDER IRREVOCABLE TRUST
By: /s/ Richard W. Snyder, II
Richard W. Snyder, II,
Trustee
By: /s/ Robert L. Snyder
Robert L. Snyder, Trustee
<PAGE>
By: /s/ Stacey M. Snyder
Stacey M. Snyder, Trustee
THE SHELLEY HALL IRREVOCABLE TRUST
By: /s/ Richard W. Snyder, II
Richard W. Snyder, II,
Trustee
THE ROB SNYDER IRREVOCABLE TRUST
By: /s/ Richard W. Snyder, II
Richard W. Snyder, II,
Trustee
By: /s/ Robert L. Snyder
Robert L. Snyder, Trustee
By: /s/ Stacey M. Snyder
Stacey M. Snyder, Trustee
THE TAMMY SNYDER IRREVOCABLE TRUST
By: /s/ Robert L. Snyder
Robert L. Snyder, Trustee
THE JORDAN MARIE SNYDER
IRREVOCABLE TRUST
By: /s/ Robert L. Snyder
Robert L. Snyder, Trustee
THE ZACHARY AUSTIN SNYDER
IRREVOCABLE TRUST
By: /s/ Robert L. Snyder
Robert L. Snyder, Trustee
THE STACEY SNYDER IRREVOCABLE
TRUST
By: /s/ Richard W. Snyder, II
Richard W. Snyder, II,
Trustee
By: /s/ Robert L. Snyder
Robert L. Snyder, Trustee
By: /s/ Stacey M. Snyder
Stacey M. Snyder, Trustee
THE ARNOLD VERBEEK IRREVOCABLE
TRUST
<PAGE>
By: /s/ Stacey M. Snyder
Stacey M. Snyder, Trustee
THE INDIVIDUAL MINORITY
SHAREHOLDERS:
/s/ Leonard Lewis Snyder, Jr.
Leonard Lewis Snyder, Jr.
/s/ Beulah Strieter Snyder
Beulah Strieter Snyder
<PAGE>
Schedule A
Amended and Restated Tax Indemnification Agreement
Dated July 8, 1998
Records Requiring Permanent Retention
The following records relating to each of SnyderGeneral Corporation,
SnyderGeneral Holding Company, and their Subsidiaries are required to be
permanently retained by AMI:
1. Board of Directors and shareholder minutes for each domestic
corporation.
2. Stock record books for each domestic corporation.
3. All documents relating to acquisitions/mergers relating to
companies/assets still owned.
4. All top level LIFO records, including double extensions and index
calculations.
5. All fixed asset records including cost, etc., as long as company(s) own
or use asset.
6. General ledgers and journal vouchers.
7. Annual financial statements with supporting work papers.
8. All records normally retained for tax audits until the year is closed
for IRS purposes.
9. All records physically in the Dallas tax department, along with tax
records located in Louisville and Minneapolis, unless destruction is
authorized in writing. These records will include (among other
records):
(a) All federal and state income and franchise tax returns with
supporting M-1 detail;
(b) All sales tax returns with supporting workpapers;
(c) Revenue Agents Reports;
(d) All fixed asset and depreciation records; and
(e) LIFO calculations.
10. Documents of the foreign subsidiaries maintained at their locations
that correspond to the above U.S. items.
<PAGE>
Schedule B
Amended and Restated Tax Indemnification Agreement
Dated July 8, 1998
Calculations Related to Closing Agreements
PAGE 18
PAGE 7
<PAGE>
Schedule B
Amended and Restated Tax Indemnification Agreement
<TABLE>
<CAPTION>
Calculations Calculations Payment
Including Excluding Due to/
Shareholder Taxable Year SnyderTech SnyderTech (from) AMI Totals
<S> <C> <C> <C> <C>
1987
Account balance as of October 31, 1997 0 0 0
Tax increase (decrease) per Closing Agreement 0 0 0
Deficiency interest due 0 0 0
Refund interest due 0 0 0
--------------------------
Account balance as of May 31, 1998 0 0
--------------------------
--------------------------
39.6% Tax on interest refund 0
-----------
Net due to AMI $ -
1988
Account balance as of October 31, 1997 0 0 0
Tax increase (decrease) per Closing Agreement (1,169,123) (1,169,123) 1,169,123
Deficiency interest due 0 0 0
Refund interest due (736,711) (681,895) 681,895
Credit applied to 1990 770,950 848,807 (848,807)
--------------------------
Account balance as of May 31, 1998 (1,134,884) (1,002,211)
--------------------------
--------------------------
39.6% Tax on interest refund (270,030)
-----------
Net due to AMI $ 732,181
1989
Account balance as of October 31, 1997 (1,790,708) (1,790,708) 1,790,708
Tax increase (decrease) per Closing Agreement 1,422,457 1,542,414 (1,542,414)
Deficiency interest due 96,936 147,458 (147,458)
Refund interest due (98,634) (34,150) 34,150
--------------------------
Account balance as of May 31, 1998 (369,949) (134,986)
--------------------------
--------------------------
39.6% Tax on interest refund (13,523)
-----------
Net due to AMI $ 121,463
1990
Account balance as of October 31, 1997 0 0 0
Tax increase (decrease) per Closing Agreement 582,171 660,029 (660,029)
Deficiency interest due 0 0 0
Refund interest due (71,636) (71,636) 71,636
Credit applied from 1988 (770,950) (848,807) 848,807
--------------------------
Account balance as of May 31, 1998 (260,415) (260,414)
--------------------------
--------------------------
39.6% Tax on interest refund (28,368)
-----------
Net due to AMI $ 232,046
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
1991
Account balance as of October 31, 1997 0 0 0
Tax increase (decrease) per Closing Agreement (394,096) (404,433) 404,433
Reduction in deficiency interest due (16,573) (16,991) 16,991
Refund interest due -208,188 -213,664 213,664
--------------------------
Account balance as of May 31, 1998 (618,857) (635,088)
--------------------------
--------------------------
39.6% Tax on interest refund (84,611)
-----------
Net due to AMI $ 550,477
1992 and 1993
Account balance as of October 31, 1997 0 0 0
Tax increase (decrease) per Closing Agreement 0 0 0
Deficiency interest due 0 0 0
Refund interest due 0 0 0
--------------------------
Account balance as of May 31, 1998 0 0
--------------------------
--------------------------
39.6% Tax on interest refund 0
-----------
Net due to AMI $ -
1994
Account balance as of October 31, 1997 0 0 0
Tax increase (decrease) per Closing Agreement (1,878,377) (1,811,326) 1,811,326
Deficiency interest due 0 0 0
Refund interest due (528,639) (509,769) 509,769
--------------------------
Account balance as of May 31, 1998 (2,407,016) (2,321,095)
--------------------------
--------------------------
39.6% Tax on interest refund (201,869)
-----------
Net due to AMI $2,119,226
1995
Account balance as of October 31, 1997 0 0 0
Tax increase (decrease) per Closing Agreement (237,283) (237,283) 237,283
Deficiency interest due 0 0 0
Refund interest due (42,892) (42,892) 42,892
--------------------------
Account balance as of May 31, 1998 (280,175) (280,175)
--------------------------
--------------------------
39.6% Tax on interest refund (16,985)
-----------
Net due to AMI $ 263,190
----------
Adjustments to Capital Gain on Stock Sale
Sub-total of net amounts due to AMI which increase Shareholder stock basis
$4,018,583 Net due to AMI (tax benefit on above at 20% rate, plus gross-up
thereon) 1,004,646
----------
TOTAL NET DUE TO AMI $5,023,228
----------
----------
</TABLE>
<PAGE>
Exhibit 10.31
SETTLEMENT AGREEMENT
AND
COMPLETE AND PERMANENT RELEASE
This Settlement Agreement and Complete and Permanent Release (the
"Agreement") is dated as of July 8, 1998, by and among AAF-McQuay Inc.,
("AMI"), AAF-McQuay Holdings, Inc. ("AHI"), O.Y.L. Industries Berhad ("OYL"),
Richard W. Snyder ("Snyder"), Roberta M. Snyder ("Mrs. Snyder"), Michael
Caolo ("Caolo"), Barton L. Bailey, Gerald L. Boehrs, James F. Brum, Dick W.
Driggs, Norbert O. Grohmann, Bruce E. Hebert, and Charles J. Tambornino
(collectively, the "NEPI Holders, and together with AMI, OYL, Snyder, Mrs.
Snyder, and Caolo, the "Parties").
WHEREAS, OYL, Snyder, certain parties referred to as "Sellers,"
SnyderGeneral Corporation ("SGC"), Caolo, and the NEPI Holders entered into
that certain Stock Purchase Agreement, dated as of March 31, 1994 (the
"SPA");
WHEREAS, SGC, SnyderGeneral Holding Company ("SGHC"), Snyder, Mrs.
Snyder, and the Sellers entered into that certain Tax Indemnification
Agreement, dated May 2, 1994 (the "TIA"), and certain parties entered into
that Income Tax Sharing Agreement, dated May 2, 1994 (the "TSA");
WHEREAS, pursuant to the terms of the SPA, SGC issued a promissory note,
dated May 2, 1994, in the principal amount of $11,500,000 (the "Promissory
Note") for the benefit of the persons listed on Exhibit A thereto;
WHEREAS, SGC and SGH subsequently
changed their names to "AAF-McQuay Inc." and "AAF-McQuay Holdings, Inc.,"
respectively;
WHEREAS, the Promissory Note is currently being held, together with a
related Letter of Credit (herein so-called), by Bank One, Texas, N.A., as
Paying Agent,
<PAGE>
pursuant to the Paying Agent Agreement (the "PAA") dated May 2, 1994, by and
among OYL, Snyder, Caolo, the NEPI Holders and Bank One;
WHEREAS, the Parties have asserted certain claims and counterclaims
regarding the SPA and the documents related thereto, including the TIA, in an
arbitration before the Dallas Office of the American Arbitration Association,
Case No. 71-168-00036-97 (the "Arbitration");
WHEREAS, bona fide disputes and controversies exist between the Parties
regarding the claims and counterclaims in the Arbitration, the SPA, the
documents related thereto, including the TIA and the Promissory Note, and by
reason of such disputes and controversies, the Parties desire to (i) amend
and restate the TIA and (ii) finally, fully, and completely compromise,
settle and release any and all claims and causes of action of any kind
whatsoever that were asserted, or could have been asserted, by any party in
the Arbitration or in any separate arbitration or judicial proceeding,
arising out of or related to the allegations, events, and/or transactions
described in the Arbitration or relating to the SPA, the documents related
thereto, including the TIA, the PAA, or Promissory Note except as otherwise
provided herein; and
WHEREAS, the Parties intend that the full terms and conditions
of compromise, settlement and release be set forth in this Agreement;
2
<PAGE>
NOW THEREFORE, in consideration of the recitals set forth above, and the
additional promises and consideration stated herein, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Parties do hereby agree to finally, fully, and completely
compromise, settle and release their disputes as follows:
MONETARY TERMS
1.1 Settlement Payment. AMI will pay (i) $10,500,000 cash plus (ii)
$13,416.67 cash, which represents the interest accrued on the Promissory Note
from July 2, 1998, to the date of the final settlement (the "Settlement
Payment").
1.2 Payment Method. AMI will pay (i) $885,696.32 (the amount of actual
fees and expenses incurred by Snyder in the Arbitration) in cash directly to,
and for the sole benefit of, Snyder and (ii) the remaining $9,627,720.35 of
the Settlement Payment in cash directly to, and for the individual benefit
of, Snyder, Caolo, and the NEPI Holders in accordance with their respective
offset percentages (as such term is defined on Schedule A to the Promissory
Note), all as set forth on Exhibit A hereto.
OTHER CONSIDERATION
2.1 Relinquishment of Promissory Note. As consideration for the payment
and receipt of the Settlement Payment, OYL and Snyder will execute the
Instruction Letter attached hereto as Exhibit B authorizing the Paying Agent
to return the Promissory Note and the Letter of Credit to AMI.
2.2 Amended and Restated Tax Indemnification Agreement. As additional
consideration for the payment and receipt of the Settlement Payment, AMI (as
successor-in-interest to SGC), AHI (as successor-in-interest to SGH), Snyder,
Mrs. Snyder, and the Sellers will execute the Amended and Restated Tax
Indemnification Agreement attached as Exhibit C
3
<PAGE>
hereto.
2.3 Termination of Rights and Obligations under the Stock Purchase
Agreement. As additional consideration for the payment and receipt of the
Settlement Payment, the Parties agree and acknowledge that the SPA and PAA
are terminated, and all rights, benefits, burdens, obligations and duties
under such agreements have no further force and effect; provided, however,
that the provisions in section 10.3(a) of the SPA shall remain in effect.
Accordingly, the Parties agree and acknowledge that the TSA has no further
force and effect.
RELEASES
3.1 Release by OYL, AMI, and AHI. OYL, AMI, AHI, and their respective
current and former employees, officers, directors, shareholders, affiliates,
incorporators, successors, predecessors, partners, parent companies,
subsidiaries, assigns, executors, agents, advisors, investment bankers,
attorneys, and representatives of any kind (collectively, "Related Parties"),
if any, by this Agreement, hereby forever RELEASE, SURRENDER, REMISE, ACQUIT,
and FOREVER DISCHARGE Snyder, Mrs. Snyder, Caolo, the NEPI Holders, and their
respective Related Parties, if any, from any and all claims, demands,
damages, entitlements, actions, causes of action, suits in equity,
liabilities, debts, accounts, costs, expenses, setoffs, contributions,
payments, bills, promises, covenants or warranties of any kind or nature
(whether past, present, future, currently accrued, unaccrued, known or
unknown), and whether permanent, continuing, or otherwise, that relate to or
arise from the Arbitration, the SPA, the TIA, the PAA, or the Promissory
Note, INCLUDING, WITHOUT LIMITATION, ANY AND ALL STATUTORY AND COMMON LAW
CLAIMS FOR BREACH OF EXPRESS OR IMPLIED CONTRACT, CLAIMS FOR INDEMNITY OR
RECOVERIES, PAYMENTS DUE AND OWING, MONIES HAD AND RECEIVED,
4
<PAGE>
QUANTUM MERUIT, ACCOUNTING PRINCIPLES OF ANY KIND, BREACH OF FIDUCIARY DUTY,
NEGLIGENCE, NEGLIGENT MISREPRESENTATION, FRAUD, CONSTRUCTIVE FRAUD, FRAUDULENT
INDUCEMENT, FRAUDULENT MISREPRESENTATION, FRAUDULENT TRANSFER, BREACH OF THE
IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING, OR CONVERSION BUT SPECIFICALLY
EXCLUDING ANY CLAIMS ARISING UNDER THIS AGREEMENT OR THE AMENDED AND RESTATED
TAX INDEMNIFICATION AGREEMENT.
5
<PAGE>
3.2 Release by Snyder, Mrs. Snyder, Caolo, and the NEPI Holders. Snyder,
Mrs. Snyder, Caolo, the NEPI Holders, and their respective Related Parties,
if any, by this Agreement hereby forever RELEASE, SURRENDER, REMISE, ACQUIT,
AND FOREVER DISCHARGE OYL, AMI, AHI, and their Related Parties, if any, from
any and all claims, demands, damages, entitlements, actions, causes of
action, suits in equity, liabilities, debts, accounts, costs, expenses,
setoffs, contributions, payments, bills, promises, covenants or warranties
(whether past, present, future, currently accrued, unaccrued, known or
unknown), and whether permanent, continuing, or otherwise, that relate to or
arise from the Arbitration, the SPA, the TIA, the PAA, and the Promissory
Note, INCLUDING, WITHOUT LIMITATION, ANY AND ALL STATUTORY AND COMMON LAW
CLAIMS FOR BREACH OF EXPRESS OR IMPLIED CONTRACT, CLAIMS FOR INDEMNITY OR
RECOVERIES, PAYMENTS DUE AND OWING, MONIES HAD AND RECEIVED, QUANTUM MERUIT,
ACCOUNTING PRINCIPLES OF ANY KIND, BREACH OF FIDUCIARY DUTY, NEGLIGENCE,
NEGLIGENT MISREPRESENTATION, FRAUD, CONSTRUCTIVE FRAUD, FRAUDULENT
INDUCEMENT, FRAUDULENT MISREPRESENTATION, FRAUDULENT TRANSFER, BREACH OF THE
IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING, OR CONVERSION BUT
SPECIFICALLY EXCLUDING ANY CLAIMS OR DEMANDS ARISING UNDER THIS AGREEMENT,
THE AMENDED AND RESTATED TAX INDEMNIFICATION AGREEMENT, ANY EXECUTIVE
EMPLOYMENT AND COMPENSATION AGREEMENTS (AS MODIFIED), AND ANY RIGHTS OF
INDEMNITY (INCLUDING RIGHTS FOR PAYMENT OF COSTS OF DEFENSE) WITH REGARD TO
THIRD-PARTY CLAIMS THAT ANY FORMER OFFICER OR DIRECTOR OF SGC OR SGH MAY HAVE
AGAINST AMI OR AGAINST ANY INSURANCE CARRIER.
6
<PAGE>
INDEMNIFICATION
4.1 Each Party represents that they have not made any assignment of any
claims described herein and that they know of no person or entity that
intends to assert a claim by, through, under, or on behalf of such Party. TO
THE EXTENT THAT ANY CLAIM MAY BE BROUGHT AGAINST A PARTY BY PERSONS OR
ENTITIES CLAIMING BY, THROUGH, OR UNDER A PARTY, THE PARTY THROUGH WHICH SUCH
CLAIM IS BROUGHT AGREES TO DEFEND, INDEMNIFY, AND HOLD HARMLESS THE OTHER
PARTIES (AND ANY PERSON OR ENTITY ASSOCIATED WITH SUCH PARTY THAT IS
DESCRIBED IN THIS AGREEMENT) FROM ANY COSTS OR EXPENSES, INCLUDING LEGAL
FEES, COURT COSTS, ARBITRATION FEES, JUDGMENTS, OR REASONABLE SETTLEMENT
PAYMENTS ARISING FROM SUCH CLAIMS.
CONDITIONAL ASSIGNMENT
5.1 In the event that any of the claims undertaken herein to be released
by the Parties are not, for any reason, fully, effectively, and finally
released and extinguished hereby, each Party hereby irrevocably assigns and
conveys such claims that they have to the other party, or their successors or
assigns. Any conditional assignment pursuant to this paragraph will not
relieve the party giving the assignment of any other obligation under this
Agreement, including the defense and indemnity obligations of Paragraph 4.1.
OTHER COVENANTS
6.1 No Admission of Fault. Neither the execution of this Agreement nor
compliance with its terms shall constitute an admission of any fault or
liability on the part of any of the Parties, or any of their Related Parties,
all such liability being expressly denied.
6.2 Reliance on Legal Counsel. The Parties have been advised to consult
7
<PAGE>
with an attorney prior to executing this Agreement and hereby acknowledge that
they have done so. The Parties acknowledge and represent that they have been
given a reasonable period of time to consider and execute this Agreement. The
Parties further agree that this Agreement will be deemed to be a joint drafting
effort and will not be construed against any Party.
6.3 Authority. Each Party hereby represents and warrants to the other
Parties that (i) such Party has full power and authority to execute, deliver
and perform this Agreement, (ii) the execution, delivery and performance of
this Agreement has been approved by all requisite action on the part of such
Party, and (iii) this Agreement has been executed and delivered on behalf of
such Party by their duly authorized agent and constitutes the valid and
binding obligation of such Party enforceable in accordance with its terms.
The individual signing on behalf of any non-individual Party represents to
the other Parties they are fully authorized to sign and enter into this
Agreement on behalf of the corporation for which they are signing, that they
are legally competent to execute this Agreement and that they do so of their
own free will and accord and without reliance on any representation of any
kind or character not expressly set forth herein. Each such individual
further acknowledges that they understand that each of the Parties is signing
this Agreement and agreeing hereto based upon the truth of the foregoing
representations and that otherwise the Parties would not sign or enter into
this Agreement or take any action based upon this Agreement.
6.4 Warranties. Each Party warrants to the other Parties that it has read
this Agreement and fully understands it to be a compromise, settlement and
release of all claims described herein, that the Party may have or claim
against the other Parties and any person or entity associated with the
Parties that is named or described in this Agreement. Each Party further
warrants and represents that there has been no representations, promises,
agreements, or inducements made to such Party in executing this Agreement
except as set forth expressly
8
<PAGE>
and specifically in the Agreement. Each Party warrants that it is not relying
upon any statement or representation of any agent of the Parties being released,
but rather is relying upon his or her own judgment.
6.5 Further Assurances. The Parties agree that they will, from time to
time, execute, acknowledge, and deliver, or cause to be executed,
acknowledged, and delivered, instruments, agreements, waivers, releases, and
other documents as may be reasonably requested in order to further the
compromise, settlements and release described in this Agreement.
CONSTRUCTION
7.1 Liberal Construction. Any release or consent given in this Agreement
shall be construed liberally in favor of the Party benefitting from the
release or consent, any rule of construction to the contrary notwithstanding.
7.2 Contractual Terms. It is understood and agreed that the terms of this
Agreement are contractual and not merely recitals, and that the agreements
contained herein and the consideration transferred hereby is to compromise,
settle and release all disputed claims of the Parties arising out of the
subject matter hereof and to avoid continued arbitration or litigation.
7.3 Severability and Savings Clause. This Agreement shall be construed so
far as possible to make each and all of its terms enforceable. Should any
term or provision be held to be unenforceable, such declaration shall have no
effect on the remaining provisions of this Agreement and the unenforceable
term or provision shall be severed and shall have no legal force or effect
and the remainder of this Agreement shall remain in full force and effect.
7.4 Integration Clause. This Agreement integrates the whole of all
9
<PAGE>
agreements and understandings and other dealings of any sort or character
between the Parties concerning the subject matter hereof, and supersedes all
prior negotiations, discussions, or agreements of any sort whatsoever relating
to the subject matter hereof, or any claims that might have ever been made by
one Party against any opposing Party arising out of the subject matter hereof.
THERE ARE NO UNWRITTEN ORAL OR VERBAL UNDERSTANDINGS, AGREEMENTS, OR
REPRESENTATIONS OF ANY SORT WHATSOEVER, IT BEING STIPULATED THAT THE RIGHTS OF
THE PARTIES AGAINST ANY OPPOSING PARTY SHALL BE GOVERNED EXCLUSIVELY BY THIS
AGREEMENT.
7.5 GOVERNING LAW AND VENUE. THIS AGREEMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF TEXAS, EXCEPT THAT
ANY CONFLICT OF LAWS RULE REQUIRING REFERENCE TO THE LAWS OF ANOTHER
JURISDICTION SHALL BE DISREGARDED.
7.6 Exclusive Jurisdiction. The Parties intend that any dispute regarding
this Agreement be resolved by arbitration as provided in Section 7.9, but to
the extent that any Party seeks a judicial determination of the meaning of
Section 7.9 or seeks to compel, prevent, or limit a pending arbitration, the
Parties agree that any such suit, action, or proceeding shall be brought in
the courts of the State of Texas, County of Dallas or in the United States
District Court for the Northern District of Texas and each Party hereby
submits to the exclusive jurisdiction of such courts for the purpose of any
such suit, action, or proceeding relating to this Agreement.
7.7 Headings. Headings are for convenience only and shall not limit,
expand, affect, or alter the meaning of any text.
10
<PAGE>
7.8 Multiple Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be an original and all of which
collectively shall be deemed to be one and the same instrument.
7.9 Arbitration to Enforce Agreement.
(a) The Parties specifically agree that any controversy, claim, or
dispute arising out of this Agreement or any alleged breach hereof, shall be
resolved exclusively by arbitration. Any arbitration shall take place in
Dallas, Texas, and be administered by the Dallas office of the American
Arbitration Association (the "AAA") in accordance with its Commercial
Arbitration Rules in effect at the time the arbitration is initiated
(collectively, the "Rules").
(b) As soon as a demand for arbitration is made by any Party,
the AAA shall proceed to provide a list of arbitrators from the Commercial Panel
from which the Parties shall select a panel of three neutral arbitrators in
accordance with the Rules and the normal procedures of the Dallas office of the
AAA. If necessary, the AAA shall select some or all of the arbitrators when it
is authorized to do so under the Rules.
11
<PAGE>
(c) The arbitration panel shall render a full, complete, conclusive, and
binding resolution of the dispute. The arbitration award shall assess all
reasonable attorneys' fees and costs, including the costs of the arbitration
and the arbitrators' compensation, against the losing party. Judgment on the
award may be entered in any court having jurisdiction thereof.
DATED AND EFFECTIVE as of the date first written above.
AAF-MCQUAY INC.
By: /s/ Dixie L. Randle
----------------------------
Name: Dixie L. Randle
Title: General Counsel & Assistant Secretary
AAF-MCQUAY HOLDINGS, INC.
By: /s/ Dixie L. Randle
-----------------------------------
Name: Dixie L. Randle
Title: General Counsel & Assistant Secretary
O.Y.L. INDUSTRIES BERHAD
By: /s/ Ho Nyuk Choy
--------------------------------------
Name: Ho Nyuk Choy
Title: Group Managing Director
/s/ Richard W. Snyder
----------------------------------------
RICHARD W. SNYDER
/s/ Roberta M. Snyder
------------------------------------------
ROBERTA M. SNYDER
/s/ Michael Caolo, Jr.
-------------------------------------------
MICHAEL CAOLO, JR.
12
<PAGE>
/s/ Barton L. Bailey
-----------------------------------------
BARTON L. BAILEY
/s/ Gerald L. Boehrs
-----------------------------------------
GERALD L. BOEHRS
/s/ James F. Brum
-----------------------------------------
JAMES F. BRUM
/s/ Dick W. Driggs
-----------------------------------------
DICK W. DRIGGS
/s/ Norbert O. Grohmann
-----------------------------------------
NORBERT O. GROHMANN
/s/ Bruce E. Hebert
-----------------------------------------
BRUCE E. HEBERT
/s/ Charles J. Tambornino
-----------------------------------------
CHARLES J. TAMBORNINO
13
<PAGE>
THE STATE OF MINNESOTA Section
Section
COUNTY OF HENNEPIN Section
BEFORE ME, the undersigned authority, on this day personally appeared
Dixie L. Randle as General Counsel/Asst. Sec. of AAF-McQuay Inc. known to me
to be the person whose name is subscribed to the foregoing instrument, and
acknowledged to me that he executed the same for the purposes and
consideration therein expressed, in the capacity therein stated, and as the
act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 7th day of July, 1998.
[SEAL] /s/ Paul M. Heim
Notary Public, State of Minnesota
Printed Name: Paul M. Heim
My Commission Expires: 1/31/2000
THE STATE OF MINNESOTA Section
Section
COUNTY OF HENNEPIN Section
BEFORE ME, the undersigned authority, on this day personally appeared
Dixie L. Randle as General Counsel/Asst. Sec. of AAF-McQuay Holdings, Inc.
known to me to be the person whose name is subscribed to the foregoing
instrument, and acknowledged to me that he executed the same for the purposes
and consideration therein expressed, in the capacity therein stated, and as
the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 7th day of July, 1998.
[SEAL] Paul M. Heim
Notary Public, State of Minnesota
Printed Name: Paul M. Heim
My Commission Expires: 1/31/2000
14
<PAGE>
THE STATE OF ________ Section
Section
COUNTY OF ___________ Section
BEFORE ME, the undersigned authority, on this day personally appeared
Leong Tuck Onn as Group Managing Director of O.Y.L. Industries Berhad known
to me to be the person whose name is subscribed to the foregoing instrument,
and acknowledged to me that he executed the same for the purposes and
consideration therein expressed, in the capacity therein stated, and as the
act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 8th day of July, 1998.
[SEAL]
/s/ Leong Tuck Onn
Notary Public, 102 Jalan Bangsar,
59200 Kuala Lumpur, Malaysia
Printed Name: Leong Tuck Onn
My Commission Expires: (not applicable)
15
<PAGE>
THE STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
BEFORE ME, the undersigned authority, on this day personally appeared
Richard W. Snyder known to me to be the person whose name is subscribed to
the foregoing instrument, and acknowledged to me that he executed the same
for the purposes and consideration therein expressed, in the capacity therein
stated, and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 6th day of July, 1998.
[SEAL]
/s/ Vicki A. Bolton
Notary Public, State of Texas
Printed Name: Vicki A. Bolton
My Commission Expires: 10/3/99
16
<PAGE>
THE STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
BEFORE ME, the undersigned authority, on this day personally appeared
Roberta M. Snyder known to me to be the person whose name is subscribed to
the foregoing instrument, and acknowledged to me that he executed the same
for the purposes and consideration therein expressed, in the capacity therein
stated, and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 6th day of July, 1998.
[SEAL]
/s/ Vicki A. Bolton
Notary Public, State of Texas
Printed Name: Vicki A. Bolton
My Commission Expires: 10/3/99
17
<PAGE>
THE STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
BEFORE ME, the undersigned authority, on this day personally appeared
Michael Caolo known to me to be the person whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for
the purposes and consideration therein expressed, in the capacity therein
stated, and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 30th day of June, 1998.
[SEAL]
/s/ Vicki A Bolton
Notary Public, State of Texas
Printed Name: Vicki A. Bolton
My Commission Expires: 10/3/99
18
<PAGE>
THE STATE OF TEXAS Section
Section
COUNTY OF COLLIN Section
BEFORE ME, the undersigned authority, on this day personally appeared
Barton L. Bailey known to me to be the person whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for
the purposes and consideration therein expressed, in the capacity therein
stated, and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 5th day of June, 1998.
[SEAL]
/s/ Monica L. McKinney
Notary Public, State of Texas
Printed Name: Monica L. McKinney
My Commission Expires: 1/2/2001
19
<PAGE>
THE STATE OF KENTUCKY Section
Section
COUNTY OF JEFFERSON Section
BEFORE ME, the undersigned authority, on this day personally appeared
Gerald L. Boehrs known to me to be the person whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for
the purposes and consideration therein expressed, in the capacity therein
stated, and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 18th day of June, 1998.
[SEAL]
/s/ Mary E. Stone
Notary Public, State of Kentucky
Printed Name: Mary E. Stone
My Commission Expires: 2/28/2001
20
<PAGE>
THE STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
BEFORE ME, the undersigned authority, on this day personally appeared
James F. Brum known to me to be the person whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for
the purposes and consideration therein expressed, in the capacity therein
stated, and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 3rd day of June, 1998.
[SEAL]
/s/ Monica L. Freeman
Notary Public, State of Texas
Printed Name: Monica L. Freeman
My Commission Expires: 2/17/2002
21
<PAGE>
THE STATE OF FLORIDA Section
Section
COUNTY OF ORANGE Section
BEFORE ME, the undersigned authority, on this day personally appeared
Dick W. Driggs known to me to be the person whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for
the purposes and consideration therein expressed, in the capacity therein
stated, and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 3rd day of June, 1998.
[SEAL]
/s/ Simon Buwalda, Jr.
Notary Public, State of Florida
Printed Name: Simon Buwalda, Jr.
My Commission Expires: 5/20/2002
22
<PAGE>
THE STATE OF KENTUCKY Section
Section
COUNTY OF JEFFERSON Section
BEFORE ME, the undersigned authority, on this day personally appeared
Norbert O. Grohmann known to me to be the person whose name is subscribed to
the foregoing instrument, and acknowledged to me that he executed the same
for the purposes and consideration therein expressed, in the capacity therein
stated, and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 8th day of June, 1998.
[SEAL]
/s/ Jean Hobson
Notary Public, State of Kentucky
Printed Name: Jean Hobson
My Commission Expires: 1/13/2000
23
<PAGE>
THE STATE OF TEXAS Section
Section
COUNTY OF DALLAS Section
BEFORE ME, the undersigned authority, on this day personally appeared
Bruce E. Hebert known to me to be the person whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for
the purposes and consideration therein expressed, in the capacity therein
stated, and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 4th day of June, 1998.
[SEAL]
/s/ Renata M. Fancher
Notary Public, State of Texas
Printed Name: Renata M. Fancher
My Commission Expires: 8/13/01
24
<PAGE>
THE STATE OF MINNESOTA Section
Section
COUNTY OF HENNEPIN Section
BEFORE ME, the undersigned authority, on this day personally appeared
Charles J. Tambornino known to me to be the person whose name is subscribed
to the foregoing instrument, and acknowledged to me that he executed the same
for the purposes and consideration therein expressed, in the capacity therein
stated, and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 8th day of June, 1998.
[SEAL]
/s/ Laurie J. Herman
Notary Public, State of Minnesota
Printed Name: Laurie J. Herman
My Commission Expires: 1/31/2000
25
<PAGE>
EXHIBIT A
TO
SETTLEMENT AGREEMENT
<TABLE>
<CAPTION>
Settlement Payment Directions
<S> <C>
Settlement Amount:
Base Amount: 10,500,000.00
Accrued Interest: 13,416.67
Sub-Total: 10,513,416.67
Less: Reimbursed 885,696.32
Snyder Costs:
-----------------
Total to be 9,627,720.35
Distributed:
-----------------
-----------------
</TABLE>
<TABLE>
<CAPTION>
Pro Rata Pro Rata
Recipients: Share - % Share - $
- ----------- --------- ---------
<S> <C> <C>
Snyder 88.58479% 8,528,695.85
Caolo 7.57335% 729,140.96
Bailey 0.45736% 44,033.34
Boehrs 0.36589% 35,226.87
Brum 0.54884% 52,840.78
Driggs 0.73178% 70,453.73
Grohmann 0.36589% 35,226.87
Hebert 0.36589% 35,226.87
Tambornino 1.00621% 96,875.08
--------- ------------
100.00000% 9,627,720.35
--------- ------------
--------- ------------
</TABLE>
<PAGE>
EXHIBIT B
TO
SETTLEMENT AGREEMENT
Instruction Letter
This Instruction Letter is being delivered pursuant to that certain Paying Agent
Agreement (herein so called), dated May 2, 1994, by and among O.Y.L. Industries
Berhad ("OYL"), SnyderGeneral Corporation, now known as AAF-McQuay Inc. ("AMI"),
Richard W. Snyder, individually, Michael Caolo, Jr., the individuals listed on
Exhibit A thereto, Bank One, Texas, N.A. ("Paying Agent") and Snyder in his
capacity as Representative (as defined in the Paying Agent Agreement). In
accordance with the terms of the Paying Agent Agreement, OYL and Representative
hereby request that Paying Agent release to AMI (i) that certain Promissory
Note, dated May 2, 1994, in the original principal amount of $11,500,000, and
(ii) that certain Letter of Credit, in the face amount of $11,500,000, currently
being held by the Paying Agent pursuant to the terms of the Paying Agent
Agreement.
O.Y.L. Industries Berhad
_______________________________
By: ___________________________
Title: __________________________
Representative
- ------------------------------------
Richard W. Snyder, as Representative
<PAGE>
Exhibit 10.32
[EXECUTION COPY]
SIXTH AMENDMENT TO CREDIT AGREEMENT
THIS SIXTH AMENDMENT, dated as of June 26, 1998 (this "Amendment"), to
the Credit Agreement referred to below is among AAF-McQUAY INC. (formerly known
as SnyderGeneral Corporation), a Delaware corporation (the "U.S. Borrower") and
the Lenders parties hereto.
W I T N E S S E T H:
WHEREAS, the U.S. Borrower, certain financial institutions from time to
time parties thereto (the "Lenders"), The Bank of Nova Scotia ("Scotiabank") and
Bank Bumiputra Malaysia Berhad, New York Branch as the managing agents
(collectively referred to as the "Managing Agents") for the Lenders, and
Scotiabank as the administrative agent (the "Administrative Agent") for the
Lenders have entered into the Credit Agreement, dated as of July 21, 1994 (as
amended or otherwise modified prior to the date hereof, the "Existing Credit
Agreement");
WHEREAS, the U.S. Borrower has requested the Lenders to amend the
Existing Credit Agreement in certain respects as set forth below; and
WHEREAS, the Lenders are willing, on and subject to the terms and
conditions set forth below, to amend the Existing Credit Agreement as provided
below (the Existing Credit Agreement, as amended pursuant to the terms of this
Amendment, being referred to as the "Credit Agreement");
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the U.S. Borrower and the Lenders hereby agree as
follows.
PART I
DEFINITIONS
SUBPART 1.1. Certain Definitions. The following terms (whether or not
underscored) when used in this Amendment shall have the following meanings (such
meanings to be equally applicable to the singular and plural forms thereof):
"Amendment" is defined in the preamble.
"Credit Agreement" is defined in the third recital.
"Existing Credit Agreement" is defined in the first recital.
<PAGE>
"Sixth Amendment Effective Date" is defined in Subpart 3.1.
SUBPART 1.2. Other Definitions. Terms for which meanings are provided
in the Existing Credit Agreement are, unless otherwise defined herein or the
context otherwise requires, used in this Amendment with such meanings.
PART II
AMENDMENTS TO THE
EXISTING CREDIT AGREEMENT
Effective on June 26, 1998 (subject to the terms of Part III), the
Existing Credit Agreement is hereby amended in accordance with this Part II, and
except as so amended or modified by this Amendment, the Existing Credit
Agreement shall continue in full force and effect in accordance with its terms.
SUBPART 2.1. Amendments to Article I. Article I of the Existing Credit
Agreement is hereby amended in accordance with Subparts 2.1.1 and 2.1.2.
SUBPART 2.1.1. Section 1.1 of the Existing Credit Agreement is hereby
amended by inserting the following definitions in such Section in the
appropriate alphabetical order:
"Sixth Amendment" means the Sixth Amendment to this Agreement,
dated as of June 26, 1998, among the U.S. Borrower and the Lenders
parties thereto.
"Sixth Amendment Effective Date" is defined in Subpart 3.1 of
the Sixth Amendment.
SUBPART 2.1.2. Section 1.1 of the Existing Credit Agreement is hereby
further amended as follows:
(i) the definition of "Excluded Charges" contained in Section
1.1 is hereby amended by deleting the word "and" at the end of clause
(b), re-lettering clause (c) as clause (d), and adding a new clause
(c), to read as follows:
"(c) for the fourth Fiscal Quarter of the Fiscal Year
ending 1998, non-recurring costs and expenses incurred in
connection with the proposed sale of the environmental
products division of the U.S. Borrower ("EP") and the
restructuring of EP operations in an aggregate amount not to
exceed $8,300,000 (approximately $3,800,000 in cash and
approximately $4,500,000 in non-cash charges); and"
2
<PAGE>
(ii) clause (b)(iii) of the definition of "Fixed Charge
Coverage Ratio" is hereby amended in its entirety to read as follows:
"(iii) Base Capital Expenditures (other than Computer
Capital Expenditures, in an amount not to exceed (a)
$10,000,000 during the Fiscal Year ending June 27, 1998 and
(b) $10,000,000 during the fiscal Year ending July 3, 1999);"
(iii) clause (i) of the proviso contained in the definition of
"Net Disposition Proceeds" is hereby amended in its entirety to read as
follows:
"(i) at the election of the U.S. Borrower pursuant to
clause (d) of Section 7.2.11, there may be excluded
from Net Disposition Proceeds up to $1,000,000 of
proceeds from Permitted Dispositions (whether in the
form of cash or non-cash consideration) received in
each Fiscal Year (other than Fiscal Year 1996)"
(iv) the definition of "Net Worth" is hereby amended by adding
the following language to the end of such definition:
"; provided, further that notwithstanding the foregoing or any
other term of this Agreement to the contrary, Net Worth shall
not be decreased from gains realized from the sale of the
Barry Blower product line in October, 1997 (in an amount not
to exceed $6,700,000) "
(v) clause (b)(iii) of the definition of "Unconsolidated Fixed
Charge Coverage Ratio" is hereby amended in its entirety to read as
follows:
"(iii) Capital Expenditures of the U.S. Borrower and
its U.S. Subsidiaries (exclusive of (A) Capital Expenditures
made by Foreign Subsidiaries and (B) Computer Capital
Expenditures in an amount not to exceed (a) $10,000,000 during
the Fiscal Year ending June 27, 1998 and (b) $10,000,000
during the fiscal Year ending July 3, 1999);"
(vi) the definition of "Letter of Credit Commitment Amount" is
hereby amended in its entirety to read as follows:
"Letter of Credit Commitment Amount" means, on any
date on or after the Sixth Amendment Effective Date, a maximum
Dollar Equivalent of $25,000,000, as such amount may be
permanently reduced from time to time pursuant to Section 2.2.
3
<PAGE>
SUBPART 2.2. Amendments to Section 7.2.4. The chart contained in clause
(a) ("Net Worth") of Section 7.2.4 of the Existing Credit Agreement is hereby
amended in its entirety to read as follows:
<TABLE>
<CAPTION>
Minimum
Period Net Worth
------ ---------
<S> <C>
03/29/96 through (and
including) 06/28/96 $175,000,000
06/29/96 through (and
including) 06/26/98 $185,000,000
06/27/98 through (and
including) 07/02/99 $200,000,000
07/03/99 through (and
including) 07/01/00 $215,000,000
07/02/00 and thereafter $250,000,000.
</TABLE>
Furthermore, clause (b) ("Leverage Ratio") and clause (d) ("Interest Coverage
Ratio") of Section 7.2.4 of the Existing Credit Agreement is hereby amended for
the Fiscal Quarters ending in September and December, 1998 and March and June,
1999 as set forth below:
LEVERAGE RATIO.
--------------
<TABLE>
<CAPTION>
Maximum Leverage
Period Ratio
------ -----------
<S> <C>
10/03/98 4.40:1.0
01/02/99 4.00:1.0
04/03/99 3.75:1.0
07/03/99 3.50:1.0
</TABLE>
INTEREST COVERAGE RATIO.
-----------------------
<TABLE>
<CAPTION>
Interest
Coverage
Period Ratio
------ ---------
<S> <C>
10/03/98 2.50:1.0
01/02/99 through (and
including) 07/03/99 2.75:1.0
</TABLE>
4
<PAGE>
SUBPART 2.3. Amendment to Section 7.2.11. Section 7.2.11 of the
Existing Credit Agreement is hereby amended in its entirety to read as follows:
"(d) such sale, transfer, lease, contribution or conveyance of
assets (other than capital stock of the U.S. Borrower or any
Subsidiary thereof) is in a maximum amount not to exceed
$5,000,000 (a "Permitted Disposition") in any Fiscal Year;
provided, that the sum of the aggregate amount of cash
consideration that has not been applied to prepay Loans in
accordance with clause (e) of Section 3.1.1 plus the aggregate
amount of non-cash consideration from such Permitted
Dispositions shall not exceed $1,000,000 in any Fiscal Year;
or"
PART III
CONDITIONS TO EFFECTIVENESS
SUBPART 3.1. Sixth Amendment Effective Date. This Amendment, and the
amendments and modifications contained herein, shall be and become effective on
the June 26, 1998 (the "Sixth Amendment Effective Date") when each of the
conditions set forth in this Part shall have been fulfilled to the satisfaction
of the Administrative Agent.
SUBPART 3.1.1. Execution of Counterparts. The Administrative Agent
shall have received counterparts of this Amendment, duly executed and delivered
on behalf of the U.S. Borrower and the Required Lenders.
SUBPART 3.1.2. Affirmation and Consent. The Administrative Agent shall
have received, with counterparts for each Lender, a duly executed copy of an
Affirmation and Consent to this Amendment, dated as of the date hereof, in form
and substance satisfactory to the Administrative Agent, duly executed and
delivered by each of the Obligors other than the Borrower.
SUBPART 3.1.3. Legal Details, Etc. All documents executed or submitted
pursuant hereto shall be satisfactory in form and substance to the
Administrative Agent and its counsel. The Administrative Agent and its counsel
shall have received all information and such counterpart originals or such
certified or other copies or such materials as the Administrative Agent or its
counsel may reasonably request, and all legal matters incident to the
transactions contemplated by this Amendment shall be satisfactory to the
Administrative Agent and its counsel.
5
<PAGE>
PART IV
MISCELLANEOUS; REPRESENTATIONS
SUBPART 4.1. Cross-References. References in this Amendment to any Part
or Subpart are, unless otherwise specified or otherwise required by the context,
to such Part or Subpart of this Amendment.
SUBPART 4.2. Loan Document Pursuant to Existing Credit Agreement. This
Amendment is a Loan Document executed pursuant to the Existing Credit Agreement
and shall be construed, administered and applied in accordance with all of the
terms and provisions of the Existing Credit Agreement.
SUBPART 4.3. Full Force and Effect; Limited Amendment. Except as
expressly amended hereby, all of the representations, warranties, terms,
covenants, conditions and other provisions of the Existing Credit Agreement and
the other Loan Documents shall remain unamended and unwaived and shall continue
to be, and shall remain, in full force and effect in accordance with their
respective terms. The amendments set forth herein shall be limited precisely as
provided for herein to the provisions expressly amended herein and shall not be
deemed to be an amendment to, waiver of, consent to or modification of any other
term or provision of the Existing Credit Agreement, any other Loan Document
referred to therein or herein or of any transaction or further or future action
on the part of the U.S. Borrower or any other Obligor which would require the
consent of the Lenders under the Existing Credit Agreement or any of the other
Loan Documents.
SUBPART 4.4. Payment of Fees and Expenses. The U.S. Borrower hereby
agrees to pay and reimburse the Administrative Agent for all of its reasonable
fees and expenses incurred in connection with the negotiation, preparation,
execution and delivery of this Amendment and related documents, including all
reasonable fees and disbursements of counsel to the Administrative Agent.
SUBPART 4.5. Successors and Assigns. This Amendment shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
SUBPART 4.6. Counterparts. This Amendment may be executed by the
parties hereto in several counterparts, each of which when executed and
delivered shall be deemed to be an original and all of which shall constitute
together but one and the same agreement.
SUBPART 4.7. Governing Law. THIS AMENDMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
STATE OF NEW YORK.
SUBPART 4.8. Compliance with Warranties, No Default, etc. After giving
effect to the occurrence of the Sixth Amendment Effective Date and the
amendments to the Existing Credit
6
<PAGE>
Agreement set forth above, the U.S. Borrower represents and warrants to the
Agents and the Lenders that the statements set forth in Section 5.2.1 of the
Existing Credit Agreement are true and correct.
SUBPART 4.9. Additional General Representations. In order to induce the
Lenders and the Agents to enter into this Amendment, the U.S. Borrower hereby
additionally represents and warrants as follows:
(a) the execution and delivery of this Amendment and the
performance by the U.S. Borrower, each of its Subsidiaries and each
other Obligor of each of their respective obligations hereunder, under
each other Loan Document and under the Existing Credit Agreement as
amended hereby, are within such Person's corporate powers, have been
duly authorized by all necessary corporate action, have received all
necessary governmental approval (if any shall be required), and do not
(i) contravene such Person's Organic Documents, (ii) contravene any
contractual restriction, law or governmental regulation or court decree
or order binding on or affecting such Person or (iii) result in, or
require the creation or imposition of, any Lien on any of such Person's
properties (other than pursuant to a Loan Document); and
(b) this Amendment, each other Loan Document and the Existing
Credit Agreement as amended hereby are the legal, valid and binding
obligations of the U.S. Borrower, each of its Subsidiaries and each
other Obligor enforceable in accordance with their respective terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally and by principles of equity).
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective duly authorized officers as of the day and year
first above written.
AAF-McQUAY INC.
By /s/ Andrew R. Morrison
---------------------------
Andrew R. Morrison
Title: Corporate Secretary & CFO
THE BANK OF NOVA SCOTIA
By
--------------------------------
Title:
BANK BUMIPUTRA MALAYSIA BERHAD,
NEW YORK BRANCH
By
--------------------------------
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By
--------------------------------
Title:
CITICORP USA, INC.
By
--------------------------------
Title:
8
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED NEW YORK BRANCH
By
--------------------------------
Title:
SOCIETE GENERALE, SOUTHWEST AGENCY
By
--------------------------------
Title:
COMERICA BANK
By
--------------------------------
Title:
RESTRUCTURED OBLIGATIONS BACKED BY
SENIOR ASSETS B.V.
By: Chancellor Senior Secured
Management, Inc., as
Portfolio Advisor
By
--------------------------------
Title:
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company,
its Investment Manager
By
--------------------------------
Title:
9
<PAGE>
CERES FINANCE LTD.
By
--------------------------------
Title:
STRATA FUNDING LTD.
By
--------------------------------
Title:
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective duly authorized officers as of the day and year
first above written.
AAF-McQUAY INC.
By
---------------------------
Title:
THE BANK OF NOVA SCOTIA
By /s/ J. Alan Edwards
--------------------------------
J. Alan Edwards
Title: Authorized Signatory
BANK BUMIPUTRA MALAYSIA BERHAD,
NEW YORK BRANCH
By
--------------------------------
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By
--------------------------------
Title:
CITICORP USA, INC.
By
--------------------------------
Title:
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective duly authorized officers as of the day and year
first above written.
AAF-McQUAY INC.
By
---------------------------
Title:
THE BANK OF NOVA SCOTIA
By
--------------------------------
Title:
BANK BUMIPUTRA MALAYSIA BERHAD,
NEW YORK BRANCH
By
--------------------------------
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By /s/ Timothy C. Hunt
--------------------------------
Timothy C. Hunt
Title: Vice President
CITICORP USA, INC.
By
--------------------------------
Title:
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective duly authorized officers as of the day and year
first above written.
AAF-McQUAY INC.
By
---------------------------
Title:
THE BANK OF NOVA SCOTIA
By
--------------------------------
Title:
BANK BUMIPUTRA MALAYSIA BERHAD,
NEW YORK BRANCH
By /s/ Abdul Kader Mahmud
--------------------------------
Abdul Kader Mahmud
Title: General Manager
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By
--------------------------------
Title:
CITICORP USA, INC.
By
--------------------------------
Title:
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective duly authorized officers as of the day and year
first above written.
AAF-McQUAY INC.
By
---------------------------
Title:
THE BANK OF NOVA SCOTIA
By
--------------------------------
Title:
BANK BUMIPUTRA MALAYSIA BERHAD,
NEW YORK BRANCH
By
--------------------------------
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By
--------------------------------
Title:
CITICORP USA, INC.
By /s/ Kirk P. Timm
--------------------------------
Kirk P. Timm
Title: Vice President
14
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED NEW YORK BRANCH
By
--------------------------------
Title:
SOCIETE GENERALE, NEW YORK BRANCH
By
--------------------------------
Title:
KZH CRESCENT-2 LLC
By
--------------------------------
Title:
RESTRUCTURED OBLIGATIONS BACKED BY
SENIOR ASSETS B.V.
By: Chancellor Senior Secured
Management, Inc., as
Portfolio Advisor
By
--------------------------------
Title:
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company,
its Investment Manager
By
--------------------------------
Title:
15
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED NEW YORK BRANCH
By
--------------------------------
Title: Deputy General Manager
SOCIETE GENERALE, SOUTHWEST AGENCY
By
--------------------------------
Title:
COMERICA BANK
By
--------------------------------
Title:
RESTRUCTURED OBLIGATIONS BACKED BY
SENIOR ASSETS B.V.
By: Chancellor Senior Secured
Management, Inc., as
Portfolio Advisor
By
--------------------------------
Title:
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company,
its Investment Manager
By
--------------------------------
Title:
16
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED NEW YORK BRANCH
By
--------------------------------
Title:
SOCIETE GENERALE, SOUTHWEST AGENCY
By
--------------------------------
Title:
KZH CRESCENT-2 LLC
By /s/ Virginia Conway
--------------------------------
Virginia Conway
Title: Authorized Agent
RESTRUCTURED OBLIGATIONS BACKED BY
SENIOR ASSETS B.V.
By: Chancellor Senior Secured
Management, Inc., as
Portfolio Advisor
By
--------------------------------
Title:
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company,
its Investment Manager
By
--------------------------------
Title:
17
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED NEW YORK BRANCH
By
--------------------------------
Title:
SOCIETE GENERALE, NEW YORK BRANCH
By
--------------------------------
Title:
KZH CRESCENT-2 LLC
By
--------------------------------
Title:
TORONTO DOMINIO (TEXAS), INC.
By
--------------------------------
Title:
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company,
its Investment Manager
By /s/ Justin L. Driscoll
--------------------------------
Justin L. Dirscoll
Title: Senior Vice President
18
<PAGE>
CERES FINANCE LTD.
By /s/ David Egglishaw
--------------------------------
David Egglishaw
Title: Director
STRATA FUNDING LTD.
By /s/ David Egglishaw
--------------------------------
David Egglishaw
Title: Director
19
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LIMITED NEW YORK BRANCH
By
--------------------------------
Title:
SOCIETE GENERALE, NEW YORK BRANCH
By
--------------------------------
Title:
KZH CRESCENT-2 LLC
By
--------------------------------
Title:
TORONTO DOMINIO (TEXAS), INC.
By /s/ David G. Parker
--------------------------------
David G. Parker
Title: Vice President
CRESCENT/MACH I PARTNERS, L.P.
By: TCW Asset Management Company,
its Investment Manager
By
--------------------------------
Title:
20
<PAGE>
AAF- McQuay, Inc.
Subsidiaries and Affiliates
<TABLE>
<S> <C>
AMG Holdings B.V. Netherlands
AMG Holdings N.V. Netherlands
AAF-McQuay Group Inc. Delaware, USA
AAF-McQuay Inc. Delaware, USA
AAF-McQuay Holdings Inc. Texas, USA
AAF-McQuay International Inc. Delaware, USA
McQuay Perfex Export Co. Minnesota, USA
AAF-McQuay Canada Inc. Canada
AAF-McQuay Export Inc. Barbados
J & E Hall Limited United Kingdom
Coulstock & Place Engineering Co. Ltd. United Kingdom
Balmsound Limited United Kingdom
McQuay-TPC Corp. Delaware, USA
TriState HVAC Equipment, LLP Pennsylvania, USA
American Air Filter Company, Inc. Delaware, USA
AAF McQuay UK Limited United Kingdom
AAF-Limited United Kingdom
McQuay (UK) Limited United Kingdom
Air Filters Limited United Kingdom
McQuay Italia S.p.A. Italy
AAF Luftreinigungssysteme Gessellschaft m.b.H. Austria
American Air Filter Brasil Ltda. Brazil
AAF Mauritius Ltd. Mauritius
McQuay Europa S.r.l. Italy
AAF S.r.l. Italy
AAF-Lufftechnik GmbH Germany
Beth Lufftechnik GmbH Germany
AAF Asia Pte Ltd. Singapore
AAF Pty. Limited Australia
AAF-McQuay France France
AAF-SA France
McQuay France France
Air Conditionne et Technologie - ACT Immofroid France
AAF-McQuay Netherlands B.V. Netherlands
AAF, S.A. Spain
AAF-SA Belgium
AAF, S. de R.L. de C.V. Mexico
AAF Environmental Control E.P.E. Greece
AAF-International B.V. Netherlands
AAF Hava Filtreleri ve Ticaret A.S. Turkey
AAF Saudi Arabia Ltd. Saudi Arabia
Purificacion de Aire Venezolana, C.A. Venezuela
Aerofil Filtracion de Aire C.V. Venezuela
McQuay - Ar Condicionado Brasil Ltda. Brazil
AAF Korea Company Ltd. Korea
Kirloskar AAF Limited India
McQuay Caribe, Inc. Puerto Rico
McQuay Espana S.A. Spain
Kirloskar McQuay Pvt. Ltd. India
Equipos McQuay S.A. de C.V. Mexico
Janitrol de Mexico de C.V. Mexico
McQuay Latin America L.C. Florida, USA
McQuay de Venezuela C.A. Venezuela
McQuay Hellas Air-Conditioning and Refrigeration SA Greece
AAF-McQuay L.L.C. U.A.E. (Dubai)
McQuay Beirut (Offshore), Inc. S.A.L. Lebanon
McQuay of Georgia, LLP Georgia, USA
American Air Filter Sdn Bhd Malaysia
McQuay Szanyo Klimatechnika Kft. Hungary
</TABLE>
<PAGE>
EXHIBIT 24
AAF-McQuay Inc.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned Directors of
AAF-McQuay Inc. hereby constitutes and appoints Joseph B. Hunter and Michael
J. Christopher and either of them, the true and lawful agents and
attorneys-in-fact of the undersigned with full power and authority in any of
said agents and attorneys-in-fact, to sign for the undersigned in their
respective names as Directors of AAF-McQuay Inc., the Annual Report on Form
10-K, and any and all further amendments to said Report, hereby ratifying and
confirming all acts taken by any such agent and attorney-in-fact, as herein
authorized.
Dated:
<TABLE>
<S> <C>
/s/ Joseph B. Hunter . /s/ Gerald L. Boehrs .
- ----------------------------------- --------------------------------
Joseph B. Hunter Gerald L. Boehrs
/s/ Michael J. Christopher . /s/ Liu Wan Min .
- -------------------------------- --------------------------------
Michael J. Christopher Liu Wan Min
/s/ Quek Leng Chan . /s/ Ho Nyuk Choy .
- --------------------------------- -------------------------------
Quek Leng Chan Ho Nyuk Choy
/s/ Roger Tan Kim Hock .
- -----------------------------
Roger Tan Kim Hock
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMAPNY'S CONSOLIATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 9697
<SECURITIES> 0
<RECEIVABLES> 245974
<ALLOWANCES> 7361
<INVENTORY> 124793
<CURRENT-ASSETS> 381526
<PP&E> 193533
<DEPRECIATION> 48228
<TOTAL-ASSETS> 796878
<CURRENT-LIABILITIES> 313228
<BONDS> 177083
0
0
<COMMON> 250
<OTHER-SE> 205840
<TOTAL-LIABILITY-AND-EQUITY> 796878
<SALES> 965749
<TOTAL-REVENUES> 965749
<CGS> 705615
<TOTAL-COSTS> 705615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25131
<INCOME-PRETAX> 9046
<INCOME-TAX> 4720
<INCOME-CONTINUING> 4111
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4111
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
